The plan to sell Victoria’s Secret to a private equity investor appears to be in trouble, with the buyer saying on Wednesday it wanted to terminate the deal because of the retail chain’s response to the coronavirus pandemic.
L Brands, which also owns Bath & Body Works, said in a statement that it believed Sycamore’s attempt to terminate the acquisition was “invalid,” and that it planned to “vigorously defend the lawsuit” and work toward closing the deal.
The public health crisis, which has hit apparel chains especially hard, has forced nonessential retailers to close stores, cut corporate salaries and furlough employees. Sycamore pointed to such actions as evidence that L Brands had violated the terms of its agreement, including the obligation to essentially conduct business as usual and to refrain from changing “any cash management policies, practices, principles or methodologies.”
“Until closing, L Brands is required to operate the Victoria’s Secret business in the ordinary course consistent with past practice,” Stefan Kaluzny, the co-founder and chief of Sycamore, said in a letter to L Brands, which was included in the filing. “Unfortunately, L Brands has failed to do this in a myriad of ways that have materially and irreparably damaged the Victoria’s Secret business.”
He added, “While we acknowledge that the Covid-19 pandemic is an international tragedy and health emergency, we are equally certain that it does not excuse the performance of L Brands’ obligations under the transaction agreement — obligations that L Brands has materially and incurably breached.”
The transaction had larger implications for L Brands and its chief executive, Leslie H. Wexner, a retail magnate who turned Victoria’s Secret into a global lingerie powerhouse before facing serious questions about his leadership based on the company’s internal culture and his relationship with the disgraced financier Jeffrey Epstein.
The sale provided an exit for Mr. Wexner, who had come under intense criticism in the twilight of an otherwise storied career. Mr. Wexner, 82, was expected to step down as chief executive and chairman upon the closing of the sale and retain a board seat at L Brands as chairman emeritus. Last month, the company named a new chairwoman, Sarah Nash, who was to begin the role after the Victoria’s Secret sale. Ms. Nash is the chief executive of Novagard Solutions and was a longtime investment banker at JPMorgan Chase.
“At this point, we would assess the likelihood of the transaction closing as low, though we expect that there could be a breakage fee paid by Sycamore to L Brands,” Jamie Merriman, a retail analyst at Bernstein Research, wrote in a note on Wednesday. The dissolution of the deal would mean that L Brands will have less cash on hand, without the $525 million payment from Sycamore, and retain obligations including roughly $2.5 billion in lease obligations, she wrote.
Mr. Kaluzny and his firm have been snapping up distressed retailers for years. Sycamore has bought Hot Topic, Talbots and Staples and acquired assets from bankrupt retailers like Coldwater Creek.
In its filing, Sycamore criticized specific actions taken by L Brands, including furloughing most Victoria’s Secret employees and cutting the salaries of senior employees, as well as the company’s missed April rent payments for U.S. retail stores and its “stock of merchandise of greatly diminished value.”