L Brands (LB) stock tanks as Sycamore wants to reverse its decision of buying Victoria’s Secret

In a day when the US stock market closed in the positive territory after registering negative returns in the first two days of the week, shares of women’s apparel retailer L Brands (NYSE: LB) tanked more than 15% as the private equity firm Sycamore Partners wanted to withdraw from acquiring L Brands’ Victoria’s Secret business. Sycamore stated in a court filing that L Brands has violated the deal terms and wanted the transaction agreement to be treated as invalid. L Brands responded that it will still fight for the transaction to be completed.

Sycamore deal

A week before reporting its fourth-quarter 2019 earnings results in February, L Brands announced a deal to divest its Victoria’s Secret lingerie and beauty divisions, along with the Pink business, (collectively called as Victoria’s Secret) to Sycamore for about $525 million. The Columbus, Ohio-based firm planned to make Bath & Body Works business as a publicly owned standalone company. Under the deal terms, Sycamore will own 55% of Victoria’s Secret business, while the remaining 45% stake will be owned by L Brands.

This deal, which was expected to close in the second quarter of 2020, was considered as a big boon to the already affected Victoria’s Secret’s dismal performance. There was a considerable decrease in revenue from Victoria’s Secret in recent times as it couldn’t adapt to the changing market conditions. Revenue from Victoria’s Secret decreased 8% year-over-year for the fiscal year 2019 ended February 1, 2020.

COVID-19 impact

On March 17, L Brands announced that to limit the spread of COVID-19, it will temporarily close all Bath & Body Works, Victoria’s Secret and Pink stores in the United States and Canada, effective March 17 through March 29, 2020. The closure of the stores continued as the US topped the world in COVID-19 affected cases resulting in President Donald Trump extending the nationwide lockdown. L Brands operates 1,091 Victoria’s Secret stores in the US and Canada and 1,739 Bath & Body Works stores in the US and Canada.

Like other retailers and most of the other sector companies, L Brands withdrew its profit outlook for the first quarter of 2020 amid the global health crisis. Earlier, the company had projected adjusted loss to be about $0.05 per share for the first quarter. L Brands, which elected to draw down $950 million from its revolving credit facility, suspended its quarterly cash dividend beginning in the second quarter of fiscal 2020.

The company reduced base compensation by 20% for senior executives and suspended the cash compensation of CEO Leslie Wexner, who was expected to step down from the role of CEO after the deal closing, and other members of the Board of Directors. Annual merit increases were also postponed. Also, L Brands furloughed most store associates and those who are not currently working to support the online businesses or who cannot work from home, effective April 5, 2020, until further notice.

From L Brands’ annual filing:

To the extent the impact of the coronavirus continues or worsens, we may have difficulty obtaining the materials necessary for the manufacturing of our products, factories which produce our products may remain closed for sustained periods of time, and industry-wide shipment of products may be negatively impacted. Further, if the impact of the coronavirus continues or worsens, consumer behavior may be altered for an extended period of time which would impact our cash and liquidity and financial condition.

Withdrawal

Considering the developments and the actions taken by L Brands after the COVID-19 crisis, Sycamore sent a notice to L Brands and filed a lawsuit against the retailer in a Delaware court asking the judge to terminate the deal. Sycamore accused L Brands that the actions took by the latter in response to COVID-19 breaches the agreement terms and this will degrade the lingering chain’s value.

L Brands’ response

In responding to Sycamore’s notice and the lawsuit, L Brands said that the Sycamore’s purported termination of the transaction agreement is invalid and it will defend the lawsuit and take all legal remedies to enforce its contractual rights. The company also added that it will continue to work towards closing the transaction.

Stock performance

Trading was halted for quite sometime after LB stock reached the day’s low ($8.80) today. The stock closed at $10.19 today with a whopping volume of 49.3 million. L Brands shares, which plunged to a new yearly low ($8.00) on March 17, has dropped 44% so far this year and 59% in the past 12 months.