COVID-19 Affects Transaction Agreement for L Brands, Inc.

On April 22, 2020, L Brands, Inc. [NYSE: LB] announced that Sycamore Partners, a private equity firm, delivered a notice that same day purporting to terminate the transaction agreement relating to the sale of a 55% interest in Victoria’s Secret Lingerie, Victoria’s Secret Beauty, and PINK brands that was announced on February 20, 2020.

In its press release, L Brands expresses its belief that Sycamore Partners’ purported termination of the Transaction Agreement is invalid, stating, “L Brands will vigorously defend the lawsuit and pursue all legal remedies to enforce its contractual rights, including the right of specific performance.”

According to Sycamore Partners, L Brands violated the transaction when it closed its stores, furloughed employees, and skipped rent payments. Of course, they were not alone, as the COVID-19 pandemic forced the temporary closure of many retailers. However, the private equity firm alleges that L Brands violated conditions of the transaction which states that the Company would “conduct the business in the ordinary course consistent with past practice.”

The retailer, known for its stores including Victoria’s Secret, PINK, Bath & Body Works, has been struggling with its Victoria’s Secret brand in recent years, overwhelmed with intense scrutiny and difficulties adapting to evolving consumer taste. As described in its most recent proxy statement, L Brands instituted new marketing strategies and merchandise; however, these measures failed to generate results for the lingerie merchant.

This transaction, which would provide Sycamore Partners with 55% equity interest of business conducted under the Victoria’s Secret and PINK brands, would allow L Brands to focus on its core brand: Bath & Body Works. According to the retailer’s most recent earnings report, Victoria’s Secret’s sales have dropped 10%, while Bath & Body Works’ sales have increased by the same amount.

The press release also addresses the closure of its retail stores, which were temporarily shuttered on March 17th with the original intent to reopen on March 29th. However, given the recent stay-at-home orders, the Company is now unable to determine when stores will reopen.

As stated in its March 27th press release, L Brands drew down $950 million from its revolving credit facility. Other measures mentioned in the press release include:

As of the date of the press release, the Company claimed to have more than $2 billion in cash on hand, stating, “the company believes that this cash balance, along with the actions taken as outlined above, provides the company with sufficient current liquidity.”

The transaction agreement between L Brands and Sycamore Partners is just one of many that commenced between January 1- March 31, 2020. According to our Mergers & Acquisitions database, 327 transactions were commenced in Q1 2020.

While the Victoria’s Secret transaction is the latest and one of the largest terminations to date, it’s not the only transaction facing the impacts of COVID-19. Events such as this make it increasingly evident that the ripple effects of COVID-19 impacts are only just beginning to show. This pandemic has affected business across the world and is heightening apprehensions of what’s to come.

For more information on this analysis, or for access to our Mergers & Acquisitions database, please contact us.