Sycamore Partners, a private-equity firm, had agreed to purchase a controlling stake of the lingerie retailer Victoria’s Secret from L Brands — but then the coronavirus happened.
Sycamore Partners is now trying to back out of the $525 million deal for a 55% stake in the lingerie business after L Brands Inc. (NYSE: LB) decided to take some major actions to limit the economic damage the COVID-19 outbreak would have on Victoria’s Secret retail sales, according to the lawsuit filed by Sycamore in a Delaware court Wednesday.
The news of the pending lawsuit sent L Brands stock crashing Wednesday. Shares were down 24% around 1:45 p.m. on the East Coast.
L Brands announced it was closing almost all 1,600 of its Victoria’s Secret stores around the world, and it also furloughed most of the staff that was employed at those stores.
Sycamore accused L Brands of damaging the business through these actions that also included reducing compensation for senior staff, according to the filing.
“That these actions were taken as a result of or in response to the COVID-19 pandemic is no defense to L Brands’ clear breaches of the transaction agreement,” Sycamore’s filing read.
A “material adverse effect” clause was included in the February transaction, which lets the buyer renegotiate if an extraordinary event, like a global pandemic, impacts the business being sold.
L Brands isn’t going down without a fight, though. It’s arguing that Sycamore’s attempts to end the deal are “invalid,” according to a statement reported by CNBC.
“L Brands will vigorously defend the lawsuit and pursue all legal remedies to enforce its contractual rights, including the right of specific performance,” the statement said.
The transaction snafu is only the latest blow to the struggling L Brands. The company drew down $950 million from its revolving credit facility on March 16 in an effort to increase its cash holding amid the COVID-19 shutdown. It also suspended dividend payouts to shareholders.
It’s clear that L Brands wants Victoria’s Secret under someone else’s control after sales dropped 8% in the fourth quarter of 2019, while L Brands other big retailer, Bath & Body Works, sales rose 10% over the same time frame.