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Yoox to Buy High-Fashion Retailer Net-a-Porter

Deal creates a new major player in online luxury goods market.

Italian online fashion retailer Yoox has agreed to buy Net-a-Porter, its upmarket rival, in an all-share deal that creates an industry leader in the booming online luxury market, with combined sales of 1.3 billion euros ($1.4 billion).

Net-a-Porter owner Richemont will receive 50 percent of the combined Yoox Net-a-Porter Group, but its voting rights will be capped at 25 percent, putting Yoox effectively in charge of the combined business.

“Today, we open the doors to the world’s biggest luxury fashion store. It is a store that never closes, a store without geographical borders,” said NAP founder Natalie Massenet, who will oversee editorial content of the group as executive chairman.

Yoox boss, founder and minority shareholder Federico Marchetti will become chief executive and shape strategy.

“Between us, we have changed the fashion industry somehow and we will continue to change it,” Marchetti told journalists in a conference call on Tuesday.

The online luxury goods industry is still in its infancy, making up only about 5 percent of total luxury sales because many brands put off Internet expansion, worrying it would not offer customers the same high-end experience as their stores.

But many executives now believe the Internet has redrawn battle lines between luxury brands and will be key to driving future sales, particularly among millennials.

Online luxury is not yet very profitable: Both Yoox’s and NAP’s operating margin is less than 5 percent, compared with more than 25 percent for most big luxury brands such as Gucci.

But the pair hope their bigger size will help cut warehouse, logistical, back-office and distribution costs, lifting margins.

Yoox operates the online sales of fashion brands such as Ermenegildo Zegna and Kering’s Bottega Veneta and Saint Laurent and also sells items at a discount.

Analysts said the deal could help boost Yoox’s chances of retaining luxury brands that might otherwise have wanted to take their online operations in-house once they gained experience.

“I’m positive on the outlook for the online luxury market. I believe it’s a structural change that will gain traction as younger generations of more ‘digitally minded’ managers get to the top,” said Gian Luca Pacini at Intesa Sanpaolo in Milan.

NAP, which is regarded as having helped make online shopping an entertainment experience, specializes in current season and off-the-runway items and advises customers on what to wear them with. It also published the fashion magazine Porter.

Marchetti said NAP would have the same valuation as Yoox once the deal was completed in September. Analysts valued NAP at around 1.5 billion euros, above Yoox which stood at 1.32 billion euros on Friday before news of the potential deal came out.

Yoox shares, which gained nearly 10 percent on Monday after Yoox and Richemont confirmed Reuters reports they were in talks, were up more than 8 percent in Tuesday trading, valuing Yoox at 1.56 billion euros. Richemont shares were down more than 1 percent.

The combined business will generate adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of around 108 million euros in 2014 and annual synergies of around 60 million euros by the third full year, the two companies said.

If Yoox shareholders approve the deal in June, the new group will launch a rights issue of around 200 million euros ($216 million) in the fall to fund growth, with Richemont expected to fund around half the sum, a spokesman for the Swiss group said.

Marchetti said strategic investors keen to participate in the capital increase could include luxury brands but gave no further details.

Richemont, which makes the bulk of its profit from its Cartier watch and jewelry brand, has agreed to a three-year lock-up for half of its stake, or 25 percent, which analysts said they would expect the Swiss group to eventually sell.

The Swiss group will appoint two of the 12-member board.

The deal comes less than a week after after two other high-profile Italian companies, Pirelli and World Duty Free, were taken over.

(Reporting by Astrid Wendlandt and Valentina Za; Additional reporting by Katarina Bart in Zurich; Editing by Sophie Walker)

This article originally appeared on Recode.net.