DLPH Delphi Technologies PLC

By Khadeeja Safdar and Cara Lombardo 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 23, 2020).

Private-equity firm Sycamore Partners wants to scrap its plans to take control of Victoria's Secret, a high-profile legal test of whether the coronavirus pandemic allows a buyer to walk away from an agreement reached before the outbreak.

The investor said the decision by L Brands Inc., parent of the lingerie brand, to close its U.S. stores in March, furlough the majority of its workers and skip April rent payments were violations of the proposed transaction, according to a lawsuit filed by Sycamore in a Delaware court Wednesday. The firm is seeking the court's blessing to break the deal.

Shares of L Brands, which is also the parent of Bath & Body Works, fell 15% to $10.19 in Wednesday's trading. The shares were trading above $20 in February.

In a statement, L Brands said it believes the termination of the transaction is invalid and that it "will vigorously defend the lawsuit and pursue all legal remedies to enforce its contractual rights." The company said it would continue to work toward closing the deal. It is preparing a legal response that could be filed as soon as Thursday, people familiar with the matter said.

L Brands in February agreed to sell a controlling stake in the chain and its Pink brand to Sycamore for $525 million. As part of the deal, longtime leader Leslie Wexner agreed to step down as chairman and CEO. The deal valued the lingerie brand at $1.1 billion.

Sycamore tried to renegotiate the original contract for a lower price earlier this month, said people familiar with the matter. Last week, L Brands said it had no obligation to renegotiate the price or other economic terms, according to the court filing.

The economic fallout and uncertainty from the coronavirus pandemic has brought new deal discussions largely to a halt and caused buyers like Xerox Holdings Corp. to drop proposed tie-ups. In the U.S., announced merger activity this year has dropped 57% from the same period last year to $233.7 billion, according to Dealogic.

The environment has claimed few deals that were already signed. Most deal contracts leave little room for cold-footed buyers to walk away, mergers and acquisitions lawyers say, though they sometimes use the threat to negotiate a better deal.

Prior to Sycamore's filing, the highest-profile agreed buyer to have a change of heart was SoftBank Group Corp. The Japanese conglomerate, struggling to shore up its portfolio, said it planned to back out of a deal to buy $3 billion worth of WeWork shares from investors and former and current employees. It cited various reasons including regulatory probes, though not the virus. A WeWork special board committee sued SoftBank for breach of contract this month and the two sides are set to face off in an early January trial.

Aerospace suppliers Hexcel Corp. and Woodward Inc. mutually agreed to ditch their all-stock combination in early April to focus on responding to the pandemic's far-reaching impact on their own businesses. Neither side had to pay a termination fee.

A few smaller companies have also had back-and-forths with possible partners, including Bed Bath & Beyond Inc., which was set to sell a small business to 1-800-Flowers.com before the website sought to delay the close. Also, auto-parts maker BorgWarner Inc., has accused target Delphi Technologies PLC of breaching their merger contract.

Courts are generally reluctant to let buyers off the hook but do occasionally, such as when Energy Transfer Equity LP got to walk away from a deal to buy Williams Cos. over concerns about a tax opinion in 2016. Verizon Communications Inc. was able to recut a deal after Yahoo disclosed a data breach while their combination was pending.

On March 17, L Brands said it was temporarily closing all its U.S. stores. Ten days later, L Brands said it was furloughing most of its workers as the coronavirus spread and states extended shutdown orders. L Brands also drew down $950 million from a revolving credit line, suspended its quarterly dividend and cut pay for senior executives.

According to the Delaware lawsuit, Sycamore contacted L Brands on April 2, saying it hadn't agreed to the actions and was concerned the conditions necessary for the deal to close might not be met. L Brands replied it was complying with their agreement.

The back-and-forth continued. Sycamore argued that L Brands had materially breached the contract; L Brands rejected that assertion.

Before the pandemic, L Brands was struggling with falling sales as demand for Victoria's Secret bras and underwear cooled. Like many other retailers, the company has lost out on the majority of its revenue since closing its stores.

In March, the company temporarily halted sales on the Victoria's Secret and Pink websites. It resumed the business after announcing it had taken safety precautions at its distribution centers, such as temperature checks and social-distancing measures.

Write to Khadeeja Safdar at khadeeja.safdar@wsj.com and Cara Lombardo at cara.lombardo@wsj.com

(END) Dow Jones Newswires

April 23, 2020 02:47 ET (06:47 GMT)

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