Sycamore and Victoria’s Secret: When Is a Deal Not a Deal?

Private equity firm Sycamore Partners has filed a lawsuit Wednesday seeking to nullify an agreement announced in February to acquire control of Victoria’s Secret. L Brands Inc. (NYSE: LB), the owner of Victoria’s Secret, struck a deal giving Sycamore control of the brand for $525 million.

The ink had barely dried on the agreement when L Brands in March closed all its U.S. Victoria’s Secret stores, furloughed most of the workers and didn’t make April rent payments. According to Sycamore, those actions were a violation of the transaction agreement and now the firm wants to break the deal.

The actions that L Brands took with Victoria’s Secret were no different from those taken by dozens of other retailers. The stay-at-home orders many state and local governments adopted to stop the spread of COVID-19 decimated foot traffic to brick-and-mortar stores.

Sycamore reportedly tried earlier this month to renegotiate the deal with L Brands, seeking a lower price. L Brands refused to renegotiate any economic terms of the agreement. Courts typically are not impressed by attempts to break signed agreements.

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The mergers and acquisitions business has dropped by more than 50% year over year in 2020 as the economic slowdown due to the COVID-19 pandemic has forced potential buyers to conserve cash.

Earlier this year, two aerospace parts suppliers, Hexcel Corp. (NYSE: HXL) and Woodward Inc. (NYSE: WWD) mutually agreed to terminate their all-stock merger announced in January. Neither side was required to pay a termination fee.

In January 2013, Sycamore offered to acquire then-publicly traded retailer Talbots for $3.00 a share. Talbots refused the offer and Sycamore sweetened the offer to $3.05 in March. Talbots again refused. A week later, though, Talbots agreed to an offer of $2.75 a share. Maybe Sycamore can pull off a similar deal this time.

L Brands stock dropped 15.5% on Wednesday to close at $10.19, and shares traded down another 2.6% in Thursday’s premarket at $9.93. That’s a decline of more than 40% since the beginning of the year.

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