The merger deal between a US-based private equity company, Sycamore Partners or Sycamore and L Brands Inc. or L Brands, owner of Victoria’s Secret was suspended on Wednesday, April 22, 2020, as the equity firm has decided to walk away from the $525 million deal due to the coronavirus pandemic.
Under the deal, which was signed on February 20 between the two firms, Sycamore was supposed to acquire a majority stake in Victoria’s Secret, but the deal got terminated after the lingerie brand shut down stores and furloughed staff in response to the coronavirus outbreak.
Sycamore’s Filing of Complaints
Sycamore said, in a Delaware court filing, that the owner of the lingerie brand, L Brands had breached the terms of the deal 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.
Sycamore added that L Brands also cut off most of its Victoria’s Secret employees and reduced compensation for senior staff as well as other actions that could hurt the lingerie business including not paying rent or taking receipt of new merchandise.
Sycamore said in its complaint, “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.” In addition to this, the equity firm said in its statement that the lingerie brand had also rejected its request to renegotiate the deal price since the business of Victoria’s Secret had been hit by the pandemic.
Under the deal agreement, L Brands was supposed to keep a 45% stake in Victoria’s Secret and the rest of the share with Sycamore. The L Brands’ divestment to Sycamore would allow the owner of the lingerie brand to focus on its better-performing subsidiary, Bath & Body Works brand that sells soaps and lotions, which are mostly located in malls across the United States (US).
L Brands Challenging Sycamore
Following the announcement of Sycamore’s withdrawal from the deal, L Brands responded that Sycamore’s decision to terminate the transaction agreement was invalid and vowed to challenge the move, filing a high-profile US legal case against the equity firm over the termination of a merger agreement. L Brands added 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.
Merger agreements generally take into account such as contractual provisions to protect the parties involved against such unprecedented situations caused by natural calamities like earthquakes, pandemics, and ‘acts of God’ as possible ways out of a deal.
Meanwhile, sources reported that the deal between L Brands and Sycamore was carved-out in such a way to prevent the acquirer from citing a pandemic’s impact on Victoria Secret’s business for a reason to walk away. However, the private equity firm argued in its filing that this did not amount to the authority to breach that had occurred.
Columbia Law School professor, Eric Talley said in an interview after reviewing Sycamore’s complaint, “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,” Talley added that it was possible that the two firms could renegotiate and settle the deal. Until Wednesday, L Brands’ shares dropped 15.5% to $13.78.
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