Victoria’s Secret is Sycamore? Potential merger is at risk

May 15, 2020

2 min read

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What's going on here?

The acquisition of Victoria’s Secret by Sycamore Partners is in peril after the private equity firm cited COVID-19  induced store closures and furloughs as a reason for backing out of the $525m deal.

What does this mean?

Sycamore Partners sued Victoria’s Secret parent company, L Brands, in the Delaware Chancery Court in late April 2020. The agreement to purchase a 55% stake in the lingerie brand was struck in February. The term in question required the business to run in “the ordinary course consistent with past practice”. The purchaser contended that since L Brands furloughed employees, shut down stores and implemented pay cuts as a result of the economic fallout from COVID-19, this breached the commitment outlined in the deal. To complicate matters, L Brands filed a countersuit asserting that according to the deal’s terms, COVID-19 would not constitute a legitimate reason for Sycamore to back out of the deal.

What's the big picture effect?

The principal point of contention in the deal agreement was the material adverse event (MAE) clause, which enables purchasers to walk away from deals in case of an unexpected occurrence that results in deteriorating business conditions. However, in this case, matters got complicated as L Brands’ lawyers specifically carved out exceptions to those unexpected occurrences- including, wait for it… a pandemic. 

To that, Sycamore contended that it still had a case following the alleged breach of the “ordinary course covenant” under which sellers must run their business as usual, in line with past practices between the deal agreement and closing. However, this would be a difficult argument to make in a Delaware court. Historically, Delaware courts have been hesitant to let buyers walk away from deals citing MAE clauses. Nonetheless, it remains to be seen how the court will interpret the ordinary course covenant in this case. 

This is not the only deal in jeopardy following the coronavirus crisis. There has been an increase in litigation activity from deals falling through due to the reluctance of purchasers to go through with them given the economic uncertainty. Xerox’s hostile takeover of HP also suffered a blow due to the economic fallout from the coronavirus. Bearing much resemblance to this deal, the directors of We Co. sued SoftBank over its decision to walk away from a $3bn stock purchase deal. 

What remains to be seen is if Sycamore can sufficiently prove that the effects of the adverse event will last for a period significant enough for it to allow them to back out of the deal. The Court’s final decision is of particular significance as it will pave the way for litigation arising out of deals entered into  prior to the economic fallout from COVID-19.

Report written by Maya Sajeev

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