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Image: Victoria's Secret

The onset of the Coronavirus has meant that retail deals of all sorts are influx. Apparel giants like adidas, Calvin Klein and Tommy Hilfiger’s parent company PVH, and Urban Outfitters, among others, have all made headlines for suspending rent payments, while their stores remain closed. (Adidas has since backtracked in light of backlash, and said that it would pay rent for the month of April). Meanwhile, mall brands, in particular, are actively demanding rent reductions, pointing to co-tenancy clauses in their leases, which enable them to take advantage of rent breaks if certain conditions are met, namely, if a specific percentage of space in a given mall is unoccupied. 

Looking beyond these increasingly common realities, a major deal is up in the air, and it may ultimately prove to be one of the biggest fights in the COVID-19 retail landscape: the $525 million deal for Victoria’s Secret. After signing off on a deal in late February to acquire 55 percent of Victoria’s Secret from its parent company L Brands, Sycamore Partners wants out, and it is pointing to the global health pandemic – and the ailing lingerie giant’s response to it – as its basis for attempting to retract on the deal. 

As the Wall Street Journal revealed last week, Sycamore Partners is seeking to terminate the deal, one that has valued Victoria’s Secret at $1.1 billion, arguing that Columbus, Ohio-based L Brands was legally “required to operate the Victoria’s Secret business in the ordinary course consistent with past practice” until the deal closed, which is slated for the second quarter of this year. However, the lingerie industry stalwart 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 were violations of the proposed transaction.” This is what the New York-based private equity giant asserted in a filing with a Delaware Chancery court on Wednesday, April 22, in which it sought the court’s blessing to terminate on the multi-hundred million dollar deal.

“While we acknowledge that the COVID-19 pandemic is an international tragedy and health emergency,” Sycamore’s co-founder and CEO Stefan Kaluzny asserted in a letter to L Brands that was included with its complaint, “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.”

Sycamore points to an array of “breaches” by L Brands that “have caused incalculable damage to the Victoria’s Secret business.” Among them? L Brands’ attempts to “drastically reduce new merchandise” and its “failure to dispose of existing out-of-season, obsolete, and excess merchandise, which has saddled Victoria’s Secret with a stock of merchandise of greatly diminished value.” And more than that, Sycamore claims that “there is significant uncertainty as to the state of employee morale in the Victoria’s Secret workforce if indeed the furloughed associates do ever return to work for Victoria’s Secret.” This alleged “erosion of employee morale will be further exacerbated,” per Sycamore, “by L Brands’ decision to reduce by 20 percent the base compensation of all employees at the level of senior VP and above.”

In case it is not enough that L Brands has run afoul of various covenants in their deal, the New York-based private equity giant claims that the onset of the “extraordinary” COVID-19 crisis brings a “material adverse effect” clause in the parties’ agreement into effect, and thus, enables it to walk away from the deal without penalty. Such a clause essentially allows a buyer to terminate a proposed transaction or agreement if, as a result of an event or series of events, a significant or material deterioration in the financial health of the target or in the stability of the target’s business occurs between the signing of the agreement and the closing.

L Brands swiftly 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 its countersuit, L Brands alleges that it was “completely transparent and forthcoming with Sycamore [about its plans to address the COVID-19 crisis when the parties signed the deal in February].” Well-versed on L Brands’ plans, representatives for Sycamore “raised no objection,” according to L Brands, and as recently as a week ago, Sycamore allegedly “assured L Brands that it intended to proceed with the transaction.” 

“Sycamore ignores a fundamental problem with its apparent case of buyer’s remorse,” according to L Brands. “At the time the parties negotiated the Agreement, the world was already well aware of the existence of COVID-19, and the parties agreed that Sycamore would bear the risk of any adverse impacts stemming from such a pandemic.” And referring to the “material adverse effect” clause that Sycamore points to in its initial complaint, L Brands claims that Sycamore’s argument is moot, as that very contract provision “expressly carves out impacts resulting from pandemics.”

Still yet, 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 claims that “L Brands’ claim for monetary damages against [it] and [its investors]” in connection with the lawsuit that it filed, has “triggered the expiration and termination of financing commitments” in connection with their deal. 

As the WSJ aptly stated last week, “With little precedent to go on, lawyers have been poring over merger agreements for vulnerabilities that could give regretful buyers a way out – or leverage to try to recut a deal for a lower price, given that most targets’ share prices have sunk.” To date, “They have found few loopholes, partly because sellers began making it harder for buyers to back out following the financial crisis when many private-equity firms tried to walk away from deals.”

*The initial case is SP VS Buyer v. L Brands, Inc., No. 2020-0297, Delaware Chancery Court (Wilmington).