Sycamore Partners pulls out of Victoria’s Secret deal

July 2020 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

July 2020 Issue

In one of the highest-profile transactions to fall victim to the coronavirus (COVID-19) pandemic, private equity firm Sycamore Partners has pulled out of a deal to acquire a majority stake in lingerie brand Victoria’s Secret.

Sycamore Partners had valued Victoria’s Secret, owned by L Brands Inc, at $1.1bn in February but filed a lawsuit against L Brands in April, arguing that its response to the coronavirus pandemic – closing nearly all of its about 1600 Victoria’s Secret and PINK stores globally, including more than a thousand stores in North America – had constituted a breach of contract.

In its court filing, Sycamore also stated that L Brands had furloughed most of its Victoria’s Secret employees and reduced compensation for senior staff, as well as taking other actions that could hurt the lingerie business, such as not paying rent or taking receipt of new merchandise.

“That these actions were taken as a result of or in response to the COVID-19 pandemic is no defence to L Brands’ clear breaches of the transaction agreement,” said Sycamore in the filing. “Specifically, L Brands agreed that a condition to plaintiff’s obligation to close the transaction is that L Brands shall have performed in all material respects all of its other obligations (under the transaction agreement) required to be performed by it on or prior to the closing date.”

Sycamore also referred to parts of the agreement made between the two parties in the lawsuit, stating that Victoria’s Secret’s parent company L Brands had agreed that it would not “change any cash management policies, practices, principles or methodologies used with respect to the business”.

Although it initially responded to the filing by arguing that Sycamore’s termination of the transaction agreement was invalid and that it would pursue all legal remedies to enforce its contractual rights, including the right of ‘specific performance’ for a judge to force completion of the deal, L Brands agreed to terminate the transaction as part of a go-forward strategy to drive long-term shareholder value.

As part of this strategy, L Brands intends to establish its Bath & Body Works brand as a pure-play public company and is taking the necessary steps to prepare the Victoria’s Secret Lingerie, Victoria’s Secret Beauty and PINK businesses to operate as a separate, standalone company.

“Like all retailers, the company faces an extremely challenging business environment,” said Sarah Nash, current director and future chair of L Brands’ board. “Our board believes that it is in the best interests of the company, our stockholders and our associates to focus our efforts entirely on navigating this environment to address those challenges and positioning our brands for success, rather than engaging in costly and distracting litigation to force a partnership with Sycamore.

Operating 2920 company-owned specialty stores – including Victoria’s Secret, PINK and Bath & Body Works – in the US, Canada, the UK and Greater China, L Brands products are also sold in more than 700 franchised locations worldwide.

“We are implementing significant cost reduction actions and performance improvements at Victoria’s Secret while continuing to drive strong growth at Bath & Body Works,” concluded Ms Nash. “We will continue to make decisions and take actions with the best interests of all our stakeholders and the future of our company in mind.”

Fraser Tennant