L Brands sues to make Sycamore Finish Victoria’s Secret Stock Purchase

By guest authors Jef Feeley and Jordyn Holman, Bloomberg News

L Brands Inc. sued to force Sycamore Partners to complete the purchase of a controlling stake in lingerie brand Victoria’s Secret, saying the deal’s terms excluded the private equity fund from using the coronavirus as a reason to back out.

Caption courtesy by CNBC Canada

Sycamore officials were well aware of the fallout from the Covid-19 pandemic when they negotiated the USD 1.1 billion buyout and accepted that the outbreak may impact the chain’s business, Columbus, Ohio-based L Brands said Thursday in its Delaware Chancery Court lawsuit. “The parties agreed that Sycamore would bear the risk of any adverse impacts stemming from such a pandemic,” L Brands said in the 32-page complaint. The deal’s specific terms expressly carved out “impacts resulting from pandemics,” they added.The filing tees up a high-profile legal battle over the whether the Covid-19 virus can be used or justify scuttling multibillion-dollar deals. Sycamore filed suit in Delaware on Wednesday saying L Brands’ moves to lay off workers and failure to pay rent during a downturn caused by the virus hurt the value of the company and violated the deal’s terms.

Michael Freitag, a spokesman for New York-based Sycamore, did not immediately return a call for comment.

L Brands derided Sycamore’s Covid-19 arguments as “nonsense” given the pandemic exclusion in the transaction’s terms.

“L Brands was completely transparent and forthcoming with Sycamore, and Sycamore assured L Brands as recently as a week ago that it intended to proceed with the transaction,” the retailer said in its suit.

Virus Closings

Victoria’s Secret operates about 1100 stores in the U.S., all of which were temporarily shut down in March due to the coronavirus outbreak. After the closures, management decided to furlough most of its 88,000 store employees across its brands, suspending paychecks but keeping some benefits active.

“These steps are consistent with steps L Brands has taken in the past when faced with global economic upheaval, including the treatment of inventory, capital expenditures, employee compensation, and other items,” the company said.

Sycamore officials were briefed on L Brand’s survival plans and “raised no objection,” according to the suit. Executives at Sycamore even admitted they were doing similar things “with its retail portfolio companies,” the suit said.

‘Very Difficult Path’

Because the deal between the lingerie chain and Sycamore Partners would be a partnership and not a total buyout of the business, this litigation creates a “very difficult path forward,” said Neil Saunders, an analyst at GlobalData Retail. If the deal goes forward it could be a strained partnership.

“If the relationship starts on the basis that they are litigating against each other, it really doesn’t make for a comfortable relationship going forward,” Saunders said. “It’s soured from the get-go.”

If the deal falls apart, it would not be the first to collapse under Covid-19 pressures. Xerox Holdings Corp. ended its hostile takeover bid for HP Inc. last month, citing uncertainties tied to Covid-19, marking a blow to the photocopier company’s efforts to stimulate future growth. Earlier this month, directors of the We Co. sued SoftBank Group Corp in Delaware over its decision to pull out of a USD 3 billion stock purchase.

L Brands will ask a Delaware judge to force Sycamore to consummate the deal because it knew Covid-19 could damage Victoria Secret’s already struggling business when they decided to sign off on the deal, which included a pandemic exclusion.

“Sycamore may wish the world did not have to face the pandemic that now confronts us and, may regret that they did not negotiate the allocation of pandemic risk differently,” L Brand’s lawyers said in the complaint. “But having made that commercial choice, Sycamore must now live by it.”

The case is L Brands v. SP VS Buyer, No. 2020-0304, Delaware Chancery Court (Wilmington)