Private equity firm Sycamore Partners is looking to back out of its deal to take over Victoria's Secret from L Brands, according to a lawsuit filed in a Delaware court on Wednesday.
The deal for Victoria's Secret to be taken private was reached in February, just weeks before the coronavirus pandemic started hammering the U.S. economy and forcing the closure of thousands of retailers' stores. It ceded a 55% share to Sycamore for $525 million, allowing L Brands to focus on running its better-performing store, Bath & Body Works.
Sycamore said in the filing that L Brands violated the transaction when it closed its stores and skipped rent payments in April. Sycamore is now seeking the court's approval to break the deal, according to the filing.
The terms of the transaction allowed for the possibility of a pandemic triggering a "material adverse effect" clause, which are typically included in deals to allow a buyer an opportunity to renegotiate should extraordinary events impact business.
So far, there have been more than 2.5 million confirmed cases of Covid-19 worldwide, with at least 45,075 deaths from the virus in the U.S., according to data from Johns Hopkins University.
L Brands said in a statement Wednesday that it intends to fight the suit, and that Sycamore's efforts to end the agreement are "invalid."
"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 company said it "intends to continue working towards closing the transactions" outlined in the proposed deal.
Sycamore has taken battles to court before. Its investment in clothing retailer Aeropostale turned sour after the clothing brand accused Sycamore of helping to drive the company into bankruptcy. A bankruptcy judge ultimately took Sycamore's side in the dispute.
The private equity firm has doubled down in retail, even as its competitors have shied away. Other investments include Talbots and Torrid.
Its attempt to withdraw from the deal comes as L Brands tries to navigate the broader challenges facing the retail industry as well as difficulties unique to its business. It has struggled to revamp the Victoria's Secret brand as it has fallen out of touch with shoppers, who have shifted away from its overtly sexy imagery. The company's founder, Les Wexner, has revealed close ties to the late sex criminal Jeffrey Epstein. Wexner plans to step down as chairman and CEO after the deal closes.
L Brands on March 16 drew down $950 million from its revolving credit facility, to bolster its liquidity during the pandemic. The company has also since suspended its quarterly cash dividend and furloughed the majority of its store workers. As of March 27, it said it had more than $2 billion in cash on hand.
Sales at Victoria's Secret in North America fell 8% in 2019 to $6.81 billion. During the fiscal fourth quarter, L Brands' same-store sales dropped 2% overall, according to its latest earnings report. Sales were down 10% at Victoria's Secret, while they were up 10% at Bath & Body Works.
Sycamore did not immediately respond to a request for comment.