Victoria's Secret

Victoria’s Secret is fighting back. 

The retailer is standing its ground, saying Sycamore Partners, the private equity firm that agreed to buy a majority stake in the intimates brand last February for $525 million, needs to pay up, according to a complaint filed in a Delaware court Thursday. Not only that, but Sycamore’s objections are likely the investment firm’s attempts to renegotiate the price of the business, said Victoria’s Secret’s parent company L Brands.

“This is a case of a buyer trying to get out of a deal,” the L Brands complaint claimed. “Sycamore’s current position is pure gamesmanship.” 

The sale of the lingerie business came into question only a day earlier, when Sycamore filed a lawsuit of its own, alleging that L Brands had violated the terms of the deal when the company “took the voluntary actions” of temporarily closing stores and furloughing employees during the coronavirus outbreak. Now Sycamore wants a Delaware judge to terminate the deal. 

But L Brands called this defense “nonsense.”

“Sycamore ignores a fundamental problem with its apparent case of buyer’s remorse: at the time the parties negotiated the agreement, the world was already well aware of the existence of COVID-19 and parties had agreed that Sycamore would bear the risk of any adverse impacts stemming from the pandemic,” L Brands’ complaint said. 

Sycamore’s plans to buy Victoria’s Secret were revealed on Feb. 20 after weeks of speculation. The lingerie brand had been struggling with declining revenues and a tainted image for the last few years.

Sycamore’s purchase of a majority of Victoria’s Secret, which includes the lingerie and beauty division, along with the Pink brand, was seen by some as the retailer’s best strategy for turning itself around. The deal also allowed L Brands’ more lucrative brand, Bath & Body Works, to become a stand-alone firm. 

Meanwhile, the coronavirus pandemic was first identified in Wuhan, China — where it is believed to have originated — in late 2019. 

The agreement between Sycamore and L Brands allegedly included a “material adverse effect” clause, or change-in-circumstance clause, that allows the buyer to cancel a transaction if there has been a significant collapse in the financial health of the company it was looking to acquire. According to Sycamore’s lawsuit, pandemics were clearly outlined as one potential pitfall. 

L Brands said this is precisely why Sycamore’s lawsuit is invalid.

“The parties agreed that Sycamore would bear the risk of any adverse impacts stemming from such a pandemic,” the retailer’s complaint said. “Indeed, the definition of ‘material adverse effect’ in the transaction agreement expressly carves out impacts resulting from pandemics.”

L Brands also pointed out that it will still be a minority shareholder in Victoria’s Secret — 45 percent — and therefore “has every economic incentive to preserve the value” of the business. 

The complaint went on to detail various dates when Sycamore attempted to renegotiate the $525 million sale price, amid the current retail environment, which has caused stores in North America to shutter indefinitely and the stock market to tank. 

Shares of L Brands, which closed up 4.32 percent to $10.63 a share Thursday, are down more than 59 percent year-over-year. The stock fell more than 24 percent during Wednesday’s trading session, after news of Sycamore’s objections and subsequent lawsuit broke.  

However, not everyone is convinced the sale is doomed. 

“Sycamore is using this lawsuit as a negotiating tactic, especially given the existence of an explicit pandemic clause in the contract,” Ike Boruchow, senior retail analyst at Wells Fargo, wrote in a note. “We believe the private equity firm is hoping to achieve a more favorable purchase price and/or delay the closing date to when trends have somewhat stabilized.”

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