Victoria's Secret Storefront

The Victoria’s Secret sale may soon be canceled.

As first reported by WWD, Sycamore Partners, which sought to buy the struggling lingerie retailer before the coronavirus began spreading around the globe, is having second thoughts. The private equity firm filed a lawsuit in a Delaware court on Wednesday, asking a judge to terminate the deal. 

Victoria’s Secret, which is owned by L Brands, said it plans to fight the lawsuit. 

L Brands believes that Sycamore Partners’ purported termination of the transaction agreement is invalid,” according to a company statement. “L Brands will vigorously defend the lawsuit and pursue all legal remedies to enforce its contractual rights, including the right of specific performance. L Brands intends to continue working toward closing the transactions contemplated by the transaction agreement.”

Like many other retailers, Victoria’s Secret was forced to close its stores in mid-March to prevent the spread of the coronavirus. With roughly 1,000 stores nationwide, Victoria’s Secret is heavily dependent on its store fleet for revenues.

The Victoria’s Secret and Pink e-commerce shops were also temporarily out of service. The following month, all in-store associates and a handful of corporate employees were furloughed to help control costs. In addition, L Brands, which also owns the Bath & Body Works and Pink brands, is rumored to have skipped out on its April rent payments in the U.S.

“That these actions were taken as a result of or in response to the COVID-19 pandemic is no defense to L Brands’ clear breaches of the transaction agreement,” according to the lawsuit filed by Sycamore. 

The investment firm alleged that the original agreement included a material adverse effect clause, or a change in circumstance clause — pandemics being one of them — that allows a buyer to cancel a transaction if there has been a significant collapse in the financial health of the company it was looking to acquire. 

Sycamore added in the court documents that Victoria’s Secret’s “voluntary actions” to temporarily close stores and furlough employees has “caused significant damage to the Victoria’s Secret business.”

In February, the private equity firm agreed to buy 55 percent of the Victoria’s Secret division from L Brands for $525 million. The transaction, which was set to close in 2020’s second quarter, included both the Victoria’s Secret lingerie and beauty divisions, along with the Pink brand. The buyout meant that L Brands would retain a minority stake in the lingerie brand and that the most profitable division, the Bath & Body Works brand, would become a stand-alone firm. 

Shares of L Brands, which closed down 15.51 percent to $10.19 a piece Wednesday, fell more than 24 percent during the same day’s trading session before the stock was briefly halted. The stock is down nearly 60 percent year-over-year. 

“News that Sycamore wants out of the deal is certainly a negative,” Kate Fitzsimons, equity analyst at RBC Capital Markets, wrote in a note. “A long legal battle regardless of the outcome is likely to remain an overhang on the shares, on top of potential distractions against the business. We wonder in the end, if a potential pulling of the sale on the part of Sycamore can ultimately help the private equity firm negotiate a deal with [L Brands] on Victoria’s Secret at a lower price tag or even a higher stake versus the original $525 million-55 percent deal arrangement.”

But the news isn’t a complete surprise to the lingerie business. In a post-pandemic world, many retailers are struggling to stay afloat. Some have already announced layoffs or permanent store closures, while others are teetering on the edge of bankruptcy

Victoria’s Secret is especially vulnerable. Even before the pandemic, the lingerie brand’s image was suffering as revenues continued to decline for the last three years. And while Victoria’s Secret is still the largest shareholder in the women’s intimate apparel market — both in the U.S. and abroad — the innerwear brand has been widely criticized for its failure to adapt to changing market conditions, L Brands’ founder Leslie H. Wexner’s relationship with Jeffrey Epstein and alleged sexual harassment within the company.

In its annual report with the Securities and Exchange Commission last month, L Brands acknowledged that there are “difficulties arising from the business uncertainties and contractual restrictions while the VS transaction is pending.” Those issues included “the risk that required regulatory approvals for the VS transaction may not be obtained.” 

And, even if the deal does go through, the company warned investors that “there can be no assurance that we will be able to realize the anticipated value and benefits therefrom, and the VS transaction may adversely affect our business. The proposed transaction will result in a smaller, less diversified and more narrowly focused business than before the VS transaction, which makes us more vulnerable to changing market and economic conditions.”

To help curb losses, the company borrowed $950 million from a revolving credit facility in March. It will also suspend its quarterly cash dividend, beginning in the second quarter of 2020, reduce capital spend, postpone employee raises and temporarily reduce base pay for senior-level associates by 20 percent. In addition, the cash compensation of Wexner and other board members have been suspended.

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