Victoria’s Secret Has Limited Options in Sycamore Battle
Signage is displayed outside a Victoria’s Secret Stores LLC store, a subsidiary of L Brands Inc., in New York, U.S. (Photographer: John Taggart/Bloomberg)

Victoria’s Secret Has Limited Options in Sycamore Battle

(Bloomberg) -- The retail shutdowns sweeping the country amid the coronavirus outbreak have put L Brands Inc. in a tough spot. With a deal to sell its iconic Victoria’s Secret brand now in jeopardy, things just got a lot worse.

The future of the ailing lingerie business is in limbo after Sycamore Partners said it wants out of the deal it struck just a few months ago to take a majority stake in Victoria’s Secret. In a court filing this week, the private equity firm said steps L Brands have taken to survive the pandemic, including furloughing workers and failing to pay rent, violated terms of the original deal.

The allegations tanked L Brands’ stock and launched what could be an ugly war between the onetime bedfellows. L Brands, which was counting on the sale to bring in cash and help revive the lingerie brand, has already said it will fight to keep the deal alive.

Whatever the outcome, what’s clear is the retailer faces a difficult road ahead. These are its options:

Make It Work

Despite Sycamore’s objections, the deal still isn’t dead. MKM Holdings analyst Roxanne Meyer expects the tie-up to go through, though she said in a note that it could be “meaningfully” delayed in court. That could weigh on L Brands’ shares, which plunged 16% Wednesday, and deepen animosity between the sides.

There is “little legal precedent” for this scenario, said Cowen & Co. analyst Oliver Chen in a note. “We do not see a clear path toward resolution.”

It wasn’t long ago that Sycamore and L Brands looked set for a happy marriage. When the deal was announced in February, Sycamore said it had “great respect and admiration” for L Brands and saw “significant opportunity to reinvigorate growth.”

Then the pandemic upended American retail. Victoria’s Secret closed its more than 1,000 U.S. stores and furloughed most of its 88,000 store associates. Sycamore said Wednesday that L Brands breached its agreement with the decisions made during the Covid-19 outbreak and are “not capable of being cured.”

L Brands called the claims “invalid” and said it would fight for the deal, which was expected to close in the second quarter. The sale, which would take Victoria’s Secret private, would help L Brands with a much-needed turnaround of the brand -- and one that could happen outside public scrutiny. That gives the company incentive to fight, even as some question the logic.

“The deal just doesn’t make sense to us as the world has changed,” Jefferies analyst Randal Konik said. “It’s that simple.”

If the two parties move their negotiations outside of the courthouse or reach a settlement, it could become a base case for future situations like this, Chen said.

A New Suitor

The coronavirus crisis could make it exceedingly difficult to find another buyer. Not only is Victoria’s Secret suffering from a catastrophic loss in sales due to virus-related store closures, but it’s a business that has lost market share and been mired in scandal for years.

With Sycamore’s accusations, it does “not bode well” for the group to find more acquisition interest, said Neil Saunders, an analyst at GlobalData Retail. “All of this couldn’t have come at a worse time,” he said.

It’s unclear who else, if anyone, was in the running to acquire Victoria’s Secret when Sycamore swooped in earlier this year to buy the business for $525 million, valuing the company at $1.1 billion. Even if other buyers emerge, offers may come in at lower values, said Poonam Goyal, an analyst at Bloomberg Intelligence.

Go It Alone

If left without a partner, Victoria’s Secret could still go it alone.

It may need to realign its executive ranks again. The group’s longtime boss and largest shareholder, Leslie Wexner, said he would step down from the chief executive role once the deal closes. Under the original plan, he would be replaced by Bath & Body Works executive Andrew Meslow.

At Bath & Body Works, L Brands’ other major business, sales have outpaced those at the lingerie chain. Annual same-store sales at Victoria’s Secret fell 7%. The brand has faced criticism for its marketing and product assortment as consumer taste shifts.

Despite the challenging circumstances, L Brands may have an opportunity to reevaluate the business at a time when the entire industry is retrenching. It also gives companies a reason to set new benchmarks.

Many retailers will say to themselves, “We have just gone through something that has lasting ramifications but it also has reset our business,” said Simeon Siegel, retail analyst at BMO Capital Markets. “Let’s plan anew.”

L Brands may simply have no other options.

“If they lose and are stuck with it,” Goyal said, “they will have to try to fix it themselves.”

©2020 Bloomberg L.P.

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