Commentary

Victoria's Secret Buyer Says Retailer's COVID-19 Actions Void The Deal

Sycamore Partners, the New York-based private equity firm that cut a deal with Leslie Wexner’s L Brands to acquire a 55% stake in Victoria’s Secret for $525 million, wants to call the whole thing off because of the actions the lingerie brand took in the wake of the coronavirus pandemic. 

The transaction, which had been in the works for some time, was announced on Feb. 20, a few weeks before the full impact of COVID-19 hit the U.S. It was due to close this quarter.

“The investor said the decision by L Brands … to close its U.S. stores in March, furlough the majority of its workers and skip April rent payments were violations of the proposed transaction, according to a lawsuit filed by Sycamore in a Delaware court Wednesday. The firm is seeking the court’s blessing to break the deal,” Khadeeja Safdar and Cara Lombardo write  for The Wall Street Journal.

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Columbus, Ohio-based L Brands, “which also owns Bath & Body Works, said in a statement that it believed Sycamore’s attempt to terminate the acquisition was ‘invalid,’ and that it planned to ‘vigorously defend the lawsuit’ and work toward closing the deal,” Sapna Maheshwari writes  for The New York Times.

“The public health crisis, which has hit apparel chains especially hard, has forced nonessential retailers to close stores, cut corporate salaries and furlough employees. Sycamore pointed to such actions as evidence that L Brands had violated the terms of its agreement, including the obligation to essentially conduct business as usual and to refrain from changing ‘any cash management policies, practices, principles or methodologies,’” Maheshwari adds.

“Victoria’s Secret managers have said their actions were ‘consistent with the steps that retailers across the country have taken in response to the pandemic,’”  Mark Vandevelde, James Fontanella-Khan and Sujeet Indap write  for Financial Times.

“However… Sycamore argued that the efforts that other store chains were taking to mitigate the public health crisis were ‘irrelevant,’ since those retailers -- unlike L Brands -- ‘do not have a detailed set of obligations with respect to the conduct of their businesses associated with an M&A transaction,’” they add.

“L Brands stock sank 20.7% before it was halted on Wednesday after it confirmed that it received notice from Sycamore Partners that the private-equity firm plans to terminate the deal…. L Brands stock has plunged 61.5% over the past year while the S&P 500 index, +2.29% [on the day], is down nearly 4% for the period,” Tonya Garcia reports  for MarketWatch.

“Sycamore has taken battles to court before. Its investment in clothing retailer Aeropostale turned sour after the clothing brand accused Sycamore of helping to drive the company into bankruptcy. A bankruptcy judge ultimately took Sycamore’s side in the dispute,” CNBC’s Lauren Thomas and Lauren Hirsch observe.

“The private equity firm has doubled down in retail, even as its competitors have shied away. Other investments include Talbots and Torrid,” they add.

Sycamore “recently attracted controversy itself when Staples reportedly skipped paying April rent to its landlords despite keeping its stores open,” Lisa Fickenscher writes  for the New York Post. It purchased the office supply company for $6.9 billion in June 2017.

“While Victoria’s Secret, known for its crystal encrusted bras and voluptuous models, is one of the most high-profile deals to result in litigation since the coronavirus outbreak, it is not the only one that has been affected,” observe  Reuters’ Jessica DiNapoli and Nivedita Balu.

“Last month, U.S. auto parts company BorgWarner Inc threatened to walk away from a $951 million deal to buy Delphi Technologies, after the automotive equipment supplier drew down a credit line without its acquirer’s approval. BorgWarner said the move breached their deal terms and gave Delphi 30 days to ‘cure’ the issue,” they write.

“A special committee for co-working company WeWork earlier this month sued its investor, SoftBank Group for ditching a $3 billion tender offer, accusing it of buyer’s remorse. Retailer Bed, Bath & Beyond this month also asked a judge to hold 1-800-Flowers.com accountable for a $252 million deal,” DiNapoli and Balu add.

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