Sycamore Partners backs out of $535m deal for Victoria’s Secret

Victoria’s Secret owner to challenge move in first high-profileUS legal Covid-19 fight

Buyout firm Sycamore Partners has walked away from a $525 million deal to acquire a majority stake in Victoria's Secret, after the lingerie brand shut down stores and furloughed staff in response to the coronavirus outbreak.

Victoria's Secret owner L Brands vowed to challenge the move, setting up the first high-profile US legal fight over the termination of a merger agreement because of the Covid-19 pandemic, which has shut down large swaths of the economy.

In a Delaware court filing, Sycamore said that L Brands had breached the terms of the deal, signed on February 20th by closing nearly all of its about 1,600 Victoria’s Secret and PINK stores globally, including more than a thousand stores in North America, without Sycamore’s permission.

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


“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,” Sycamore said in its complaint.

L Brands said 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.

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.

Last month, US car parts company BorgWarner 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.

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 Inc accountable for a $252 million deal.

Merger agreements routinely include contractual provisions to protect the parties involved, citing earthquakes, pandemics and ‘acts of God’ as possible ways out of a deal. While L Brands’ deal with Sycamore has a carve-out to prevent the acquirer from citing a pandemic’s impact on Victoria Secret’s business as grounds to walk away, the private equity firm argued in its filing that this did not cover the breach that had transpired.

"L Brands will no doubt counter, 'Are you serious, we should have defied the government's order to keep our stores open?' But Sycamore still has a potential claim, notwithstanding the public relations hit they're going to take," Columbia Law School professor Eric Talley said in an interview after reviewing the byout company's complaint.

While Sycamore said in its complaint that L Brands rejected its request to renegotiate the deal price, Talley said it was possible that the companies could settle and restructure the deal.

Under its agreement with Sycamore, L Brands would keep a 45 per cent stake in Victoria’s Secret. The divestment would allow L Brands to focus on its better-performing Bath & Body Works brand, a seller of soaps and lotions, located mostly in malls across the United States.

- Reuters