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.

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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