L Brands and Sycamore Partners on Monday announced a "mutual termination" of their deal, announced in February, for the private equity firm to take a 55% stake in Victoria's Secret for about $525 million, according to a press release from Sycamore emailed to Retail Dive.
Their agreement was in doubt as of late April, when Sycamore notified the apparel retailer that the deal was off due to L Brands' failure to maintain normal business operations, as stores closed amid the COVID-19 pandemic. Sycamore went to court in an effort to enforce that termination. Days later, L Brands sued to keep their deal intact.
Sycamore stated in its press release that "Neither party will be required to pay the other a termination fee or other consideration as a result of the mutual decision to terminate the agreement and settle the pending litigation." In its release, L Brands also announced plans to spin off Victoria's Secret into a separate company.
The COVD-19 pandemic has upended retail, as most stores have been closed for weeks in order to foster the social distancing that public health officials have said is key to slowing its spread. And now it's upended this acquisition.
While several analysts believed that L Brands would have prevailed in court, the tussle is now moot, with the retail company deeming a protracted court battle worth neither the effort nor the expense, according to a statement from Sarah Nash, a director and soon-to-be board chair. As some analysts noted, forcing a deal with Sycamore would have made for an uneasy partnership in any case. L Brands was set to retain a 45% stake in the brand.
Along with Nash's shift to the board chair position, other moves to be made under the Sycamore agreement will go forward: On May 14, during the company's (now virtual) shareholders meeting, L Brands founder, CEO and board chair Les Wexner will step down, Bath & Body Works CEO Andrew Meslow will move up to become CEO of L Brands and join the board, and three directors will step down. What's new, and effective immediately, is the appointment of L Brands CFO Stuart Burgdoerfer as interim chief executive officer of Victoria's Secret, per L Brands' press release.
That's a cause for concern, that "management is spread too thin ... at a time when liquidity and capital management are front and center," according to emailed comments from MKM Partners Managing Director Roxanne Meyer.
The companies' announcement surprised her and other analysts, and got mixed reviews overall. Meyer acknowledges that a court battle "would likely have been a timely (and expensive) process when timing is more critical than ever." Still, she sees little if any silver lining in the breakup, questioning, as other analysts did as well, what recourse L Brands now has in dealing with its debt, and noting a lack of details around the proposed separation of Victoria's Secret from the company's Bath & Body Works personal care brand.
"What is LB going to do strategically at VS that it hadn't contemplated before?" she also asked.
Wedbush analyst Jen Redding went further, calling the termination "a bitter pill to swallow for L Brands in light of troubling performance at Vicky's over the past three years, exacerbated by the current environment, and compounded by overwhelming debt." The company's debt-to-capital ratio will make it difficult for L Brands to raise more capital; that and non-purchasing obligations of over $1 billion this year and some $3.6 billion in 2021 to 2023 "make us uncertain about the company's ability to stay afloat in the mid-to-long term," Wedbush said in emailed comments.
MKM's Meyer also expects "hundreds" of Victoria's Secret stores to close as leases expire in coming years, as well as for the brand to exit Canada and the U.K., and possibly file for bankruptcy.
Other analysts are more sanguine about the split, and see an upside to store closures. Wells Fargo Senior Analyst Ike Boruchow said that, while Victoria's Secret's struggles are years long and hardly over, they're already baked into L Brands' share price. Moreover, there's plenty of value left in the brand, he said in emailed comments. "[I]t remains the market leader in the US lingerie category and was valued at ~$1B just over 2 months ago," he noted.
The brand's lease liabilities were valued at $2.5 billion when the deal was announced, but the current climate will likely provide opportunities to reduce rent or exit, he also said.
BMO Capital Markets Managing Director Simeon Siegel also believes that Victoria's Secret retains a strong brand and that today's commercial real estate realities will allow it to downsize to a more rational footprint. And he argued in emailed comments that would provide L Brands with an opportunity to accomplish what it has failed to do so far — rehabilitate Victoria's Secret."The reality is a COVID-19 related revenue decline may actually provide [management] a very unique opportunity to re-evaluate all aspects of the brand, from revenue & fleet to sizes, to promo cadence & brand imaging, emerging a smaller & healthier VS, a scenario we have been advocating for anyway."
Lee Peterson, executive vice president of thought leadership and marketing at WD Partners, who worked with Wexner when L Brands was "The Limited," agrees, noting that "any trend that was present before COVID-19 got accelerated, but it was still there."
"If you're Sycamore Partners, what were you thinking anyway? People are not shopping in stores as much, the devolvement of the brand in the MeToo era, that was all there," he said by phone. "Now you have an opportunity to close half the stores, change the marketing, shift the brand. That's also true for almost any specialty retailer right now, it's a perfect opportunity to say, 'Who are we now?'"