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Image: Victoria's Secret

The $525 million deal for Victoria’s Secret is off. Just months after Sycamore Partners agreed to acquire a 55 percent stake in Victoria’s Secret, the New York-based private equity firm revealed in a statement on Monday that it has “confirmed a mutual agreement with L Brands to terminate their transaction agreement, previously announced on February 20, 2020,” on the heels of Sycamore actively trying to bring an end to the deal, citing an array of “breaches” of the acquisition agreement by Victoria’s Secret parent company L Brands. 

The recently-revealed agreement that will see Sycamore and L Brands go their separate ways does not only void the deal, it brings a swift end to three separate lawsuits filed by the parties over the past couple of weeks, which looked as though they might prove to be the makings of one of the biggest fights in the COVID-19 retail landscape. “In connection with the termination of the Victoria’s Secret transaction agreement,” Sycamore stated on Monday that it and L Brands have “agreed to settle all pending litigation and mutually release all claims.” 

Columbus, Ohio-based L Brands – which owns Bath and Body Works in addition to the Victoria’s Secret brands, the latter of which is was slated to maintain a 45 percent, non-controlling stake in – said in a statement on Monday that the move to settle its differences (and lawsuits) with Sycamore enables it to avoid “costly and distracting litigation to force [the] partnership.”

The now-defunct lawsuits got their start on April 22 when Sycamore filed suit against L Brands in a Delaware Chancery court, arguing that while the retail group was legally “required to operate the Victoria’s Secret business in the ordinary course consistent with past practice” until the deal closed (which was slated for the second quarter of this year), it allegedly failed to uphold its end of the bargain when it “decided to close the lingerie brand’s U.S. stores, furlough the majority of its workers, and skip April rent payments.” In furtherance of its suit, Sycamore sought the court’s blessing to terminate on the deal that valued Victoria’s Secret at $1.1 billion. 

More than that, though, counsel for Sycamore asserted that the onset of the “extraordinary” COVID-19 crisis brought a “material adverse effect” clause in the parties’ agreement into effect, thereby, enabling it to walk away from the deal without incurring a steep penalty.

L Brands responded to Sycamore’s complaint with a lawsuit of its own on Thursday, April 23, asking the same court to uphold the terms of the deal, and asserting that “Sycamore’s current position is pure gamesmanship,” and “its invalid and improper termination” is little more than a quest to scoop up the Victoria’s Secret brand for less than the formerly-agreed upon price. 

In terms of the “material adverse effect” clause, L Brands called Sycamore’s bluff, arguing that “Sycamore ignores a fundamental problem with its apparent case of buyer’s remorse: at the time the parties negotiated the agreement, the world was already well aware of the existence of COVID-19,” and with that in mind, the parties’ contract included a provision in connection with the “material adverse effect” that “expressly carves out impacts resulting from pandemics.” 

As the New York Times reported shortly after the parties began filing suit, “Sycamore’s lawsuit concedes that it can’t invoke the ‘material adverse event’ clause to justify terminating the contract, given the language that specifically excludes a pandemic.” With such an express carve out in mind, one that has proven novel and striking to many lawyers (save for those at Davis Polk, who drafted the deal), Charles Elson, the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, told the paper that Sycamore’s argument would be a tough sell: “In a pandemic, you respond to a pandemic. Unless there was fraud or misconduct by L Brands management, it’s going to be very hard for them to get out of the deal.”

Potentially attempting to double-down in light of the potential weakness in its initial suit thanks to the pandemic exception, Sycamore filed a second complaint on Friday, April 24, in which it argued that if the parties’ deal was not already off the table, L Brand’s countersuit has formally “invalidated the financing that [Sycamore] had lined up” to acquire the company. Specifically, Sycamore argued that “L Brands’ claim for monetary damages against [it] and [its investors]” in connection with the lawsuit that it filed, “triggered the expiration and termination of financing commitments” in connection with their deal. 

Putting their legal troubles and a soured deal out of the way, Sycamore says 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.”

As for Victoria’s Secret, which was valued at a whopping $29 billion at its peak in 2015, it has fallen out of favor in recent years as younger, digitally-native and more millennial-friendly competitors have entered into the market and increasingly stole marketshare from the lingerie industry stalwart. Long known for its male gaze-centric marketing of supermodel “Angels,” pushup bras, and its annual televised fashion show, which was formally cancelled last year after viewership statistics began to plummet year-over-year, Victoria’s Secret “has stuck to the same playbook and lost a large number of customers to its competitors as social norms defining beauty and sexiness have changed over the years,” CNN reported in February.

Now, while Victoria’s Secret is still the largest player in the lingerie industry (with marketshare of 24 percent, according to according to a 2018 report by Coresight Research), its relevance – and sales – continue to wane, and it is once again without a buyer.