Italian online fashion retailers Yoox and Richemont's Net-a-Porter confirmed merger talks were under way to create an industry leader in the fast-growing online fashion market.

Sources told Reuters at the weekend that a purchase of Net-a-Porter by Yoox could be announced as early as this week, sending shares in the Italian group up more than 8 percent in early trade on Monday.

Yoox said it was discussing with Richemont "a potential business combination" with Net-a-Porter, adding it could not comment further for now. Shortly after, Richemont made a similarly terse statement confirming the talks. Cartier owner Richemont is keen to retain a stake in the combined entity and preserve exposure to the online fashion market, sources close to the matter said.

The two companies together would be better able to fight cut-throat competition from the bevy of online fashion retailers that have sprung up in recent years, particularly in Asia, and from upmarket department stores such as Bergdorf Goodman which have boosted investments in online trading and services. Much of the growth in online fashion retail has been driven by buyers in Asia and the United States, hunting for off-the-runway products or good deals. Many fashion buyers prefer buying online to save time but retailers make significantly lower margins if they return the product - which happens regularly. A tie-up between the two would bring together Yoox’s leading discounts offer with Net-a-Porter’s full price offer, analysts at Citi said in a note on Monday.

“No other players match Yoox/NAP’s breadth of sourcing, client base, luxury expertise and relationships,” they said. The combination would also enable Yoox to rely less on the online shopping sites it runs on behalf of various fashion names, broker Fidentiis said in a note.

Both sides explored merger talks at the end of 2013 but could not agree on a deal. This time around, an agreement might be easier to find as Net-a-Porter founder Natalie Massenet is finalising negotiations with Richemont over the five-year payout she agreed with the Swiss group when it bought control in 2010 and which is based on the value of her company as of March 31st. Richemont could use the payout, which would reach more than €100 million, to persuade Massenent into agreeing a deal with Yoox.

It is not clear however what such deal would mean for Gucci owner Kering which sells its luxury fashion brands Bottega Veneta and Saint Laurent via Yoox.

Nonetheless, Fidentiis said, “the deal would bring together two high-end fashion e-commerce players, of which one has more sales but little profit (Net-a-Porter), and the other has arguably one the strongest track records in operations (double-digit EBITDA margin) in the business,” it said.

Net-a-Porter, which is estimated to have sales of more than €700 million in the fiscal year just ending, is gauged by analysts to be worth between €1.3 billion and €1.5 billion using industry multiples.

Reuters