Retail

Victoria's Secret to go private in a deal that values the once-powerful lingerie brand at $1.1 billion

Key Points
  • Private-equity firm Sycamore Partners will acquire control of Victoria's Secret from its owner, L Brands.
  • Victoria's Secret has long lagged behind Bath & Body Works, the personal care brand that L Brands also owns.
  • Victoria's Secret has been under pressure for years. It intensified as ties between L Brands founder Les Wexner and Jeffrey Epstein came to light.
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Here are takeaways from Victoria's Secret going private

Victoria's Secret, which once dominated the lingerie category with its sexy image, will go private in a deal that shows how far the brand has fallen out of favor.

Private equity firm Sycamore Partners will acquire a 55% share in Victoria's Secret from its owner, L Brands, for $525 million, the companies announced Thursday. Upon the close of the deal, L Brands' founder, 82-year-old Les Wexner, will step down as its chairman and CEO. Wexner, the longest-serving CEO of an S&P 500 company, will remain on the board as chairman emeritus.

L Brands shares were recently up less than 1% in morning trading. The stock had tumbled as much as 10% in premarket trading after the deal was announced, likely a sign the market was disappointed in the agreement, which puts a value on the lingerie brand of $1.1 billion. L Brands, which has a market value of $6.7 billion, has seen its stock fall more than 11% in the past year. The stock's losses had narrowed in recent weeks as word of the deal talks leaked.

L Brands will now focus on running its Bath & Body Works stores as a separate company.

Victoria's Secret has been under pressure for several years as shoppers opted for other brands, such as Aerie, Adore Me and Third Love, that used more inclusive messaging. Victoria's Secret sales have tumbled for three straight years.

Despite the sales weakness, the brand still leads the fragmented lingerie category and has about $7 billion in annual sales.

L Brands will use the funds from the deal, along with $500 million in excess balance sheet cash, to reduce its debt. L Brands had also explored a transaction through which Sycamore would have invested in L Brands through "private investment in public equity" to reduce L Brands' debt load, people familiar with the talks told CNBC. The company ultimately decided against such a deal, which would have hit shareholders.

Some are concerned that the deal doesn't go far enough to lighten L Brands' debt load.

"The price is lower than our competitors' rosy view that a full sale near $3.5B was likely," said Jefferies analyst Randal Konik, who has long been bearish on the stock. "A partial sale and this low price won't help the massive debt load and shows just how desperate LB has become to try to unload VS. We think true value of VS is much lower, BBW is about to roll over, and LB shares have near 50% downside from recent elevated levels."

Konik expects a dividend cut could still be likely as the company shores up its financial position.

Wexner steps down

Wexner's departure is notable because he has long been closely associated with L Brands, which he founded in 1963. Wexner, its largest shareholder with a 16% stake, has stayed chairman and CEO even as it has underperformed and, more recently, as his ties to the late sex criminal Jeffrey Epstein came to light. His steadfastness at the helm of L Brands occurred even as other powerful figures with connections to Epstein such as Britain's Prince Andrew and entrepreneur Joi Ito stepped away from public roles in the wake of similar disclosures.

Upon the deal's closing, the company will promote Andrew Meslow from chief operating officer to CEO. He will also join its board. Meslow joined L Brands in 2003 and has spent the last 15 years at Bath & Body Works.

"I think about the endless possibilities ahead for this company. And I've thought about where I fit in the picture," Wexner wrote in an internal memo obtained by CNBC. "In keeping with this same thoughtful examination, I have decided that now is the right time to pass the reins to new leadership."

In the memo, Wexner highlighted the "resources, expertise and focus" that Sycamore has to revive the Victoria's Secret brand. The private equity firm has a long track record of investing in retail, including acquisitions of Talbots and Torrid. Wexner also said that as part of the deal, it will split its Mast Global sourcing business, part of which will be focused exclusively on serving Victoria's Secret. Sycamore had acquired 51% of Mast Global in 2011, which helped provide the platform for its expansive retail investments.

'Sharpen' focus on Bath & Body Works

The new L Brands will "sharpen its focus" on Bath & Body Works, which sells personal care products. That business has driven sales growth at the company but has recently had slower gains as malls see lighter foot traffic.

It is also extending an agreement with activist fund Barington Capital Group, which disclosed a stake in L Brands last year. The firm last year had criticized the L Brands board for its close social ties and pushed the company to split Victoria's Secret and Bath & Body Works. L Brands last year agreed to add two new directors to its board and reached a truce with Barington that was set to expire this month.

L Brands said Thursday it will continue to refresh its board. Board members Allan Tessler, Gordon Gee and Raymond Zimmerman will retire at the date of the annual meeting. L Brands has also engaged Heidrick & Struggles to help find new board members.

Wexner disclosed last year that Epstein had misappropriated more than $46 million from Wexner and his family years ago. He only recently provided documents to federal prosecutors about the missing money. He has said he first met Epstein in the mid-1980s through friends who vouched for the financier. Epstein was a trustee of the Wexner Foundation, although Wexner has said Epstein had no executive responsibilities. Epstein died in August in an apparent suicide in a New York City jail cell.

More recently, Victoria's Secret has faced accusations of professional impropriety. Its former chief marketing officer, Ed Razek, was accused of inappropriate conduct, according to allegations in a recent report by The New York Times. Razek, who stepped down last year, is said to have been close to Wexner. An L Brands spokesperson told The New York Times the company "'is intensely focused' on corporate governance, workplace and compliance practices and that it had 'made significant strides.'" Razek denied the allegations.

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Correction: Sycamore will pay $525 million for its controlling stake in Victoria's Secret. The deal puts a value on the lingerie brand of $1.1 billion.