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Cancelled deal between Victoria’s Secret and Sycamore Partners

By Calvin Hung (University Of Edinburgh)

Overview of Deal

Acquirer: Sycamore Partners Management

Target: Victoria’s Secret Stores, a subsidiary of L Brands, Inc. (NYSE:LB)

Estimated Value: $1.1 billion (Transaction of $525 million for 55% stake) Announcement date: 20/02/2020, transaction cancelled 04/05/2020

Acquirer Advisors: N/A

Target Advisors: PJT Partners, Bridgepark Advisors

On the 20th of February, Sycamore Partners announced an agreement had been reached with L Brands for the purchase of a 55% majority stake in Victoria’s Secret for £525M. Once a major retail fashion player with an estimated $7bn in sales annually, the spinoff of Victoria’s Secret was an opportunity for L Brands to revive the fortunes of the group which has suffered from falling revenue year on year.

This transaction also follows activist pressures such as that from Barington Capital who pushed for a sale of Victoria’s Secret. The transaction value suggests that there has been a sharp decline in the valuation of Victoria’s Secret. Potential reasons for this include impact on Company’s Image and PR, change in consumer preferences and reduction in quality of products.

L Brands wish for Victoria’s Secret to be a standalone company so that they can focus on growing a more successful Bath & Body Works. However, amid the Covid-19 pandemic, Sycamore Partners pulled out the deal, and despite legal action by L Brands, the transaction cancellation was confirmed on the 4th of May 2020.

Sycamore Partners attributed the cancellation not only due to Covid-19 (even though in the legal contract, under the material adverse clause, pandemics were excluded as an acceptable reason for termination) but also argued that L Brands had breached the contract with the furloughing of staff, cancellation of shipments and closure of stores. These were not consistent past practice business operations which in turn also impacted the value of the company.

“We believe this structure will allow Bath & Body Works – which represents the vast majority of 2019 consolidated operating income – to continue to achieve strong growth and receive its appropriate market valuation. The transaction will also allow the company to reduce debt.”
Leslie Wexner, Founder and Chairman Emeritus of L Brands.

Company Details (Sycamore Partners)

Sycamore Partners is a middle-market private equity firm that specialises in the buyout of companies in the Consumer and retail sector. Sycamore Partners strategy is to obtain majority stakes and partner with management teams to improve the profitability and strategic value of their businesses. It currently has approximately $10bn AUM, with their current investment portfolio including Belk, Pure Fishing and Staples.

Founded in 2011, headquartered in New York, United States

President: Rob Sweeney

Number of Professionals: 20

AUM: Estimated $10bn

Total investments: 29

Company Details (L Brands)

L Brands is an international company that operates in the retailing of women’s apparel, personal care, and beauty products. These can be split into three segments: Victoria’s Secret, Bath & Body Works, and International. As of May 2020, the company operates 2897 stores in the US, Canada, UK, and Greater China in addition to 700 franchised stores worldwide and its online operations. Victoria’s Secret is a lingerie, clothing, and beauty retailer. Founded in 1977, L Brands bought the company in 1982 from its founders Roy and Gaye Raymond.

Founded in 1963, headquartered in Columbus, Ohio, United States

CEO (Post-transaction) & Director: Andrew Meslow,

Founder, Chairman Emeritus and President (CEO pre-transaction): Leslie Wexner Number of Employees: approximately 59,000

Market Cap: $3.93bn (as of Market Close on 24/06/2020)

EV: $13.04bn

Debt: $5.72bn

Net Debt: $3.15bn

LTM Revenue: $11.94 bn

LTM EBITDA: $1.45bn


LTM EV/Revenue: 1.10x

LTM Debt/EBITDA: 3.95x

Projections and assumptions

Short term Consequences

It was announced upon the closing of the transaction, Leslie Wexner will step down as CEO and Chairman of the Board of L Brands but remain on the board of directors as Chairman Emeritus. At the closing of the transaction, Andrew Wessler will take over as CEO. This satisfies the calls from activist hedge fund Barington Capital who will also continue in their special advisor role to L Brands for an additional 12 months.

L Brands will continue to hold a 45% stake in Victoria’s Secret. For L Brands, the spinoff of Victoria’s Secret would allow for a better representation of the market’s valuation of its more successful Bath & Body Works business and ultimately creates shareholder value. Projections indicate that Victoria’s Secret Sales would continue to decline given the controversy that surrounds the company. This combined with a difficult retail backdrop would support this projection. Analysts now predict sales will fall anywhere between 32% and 69% in 2020. L Brands will use the money from the sale in addition to its excess cash to pay off some of its $5.72bn debt.

Long term Consequences

At an implied transaction value of $1.1bn, this suggests that L Brands is keen to sell Victoria’s Secret even if that means at a discount. For any future buyers of Victoria’s Secret, as L Brands are looking to sell, they can achieve an even greater discount especially with the impact of Covid-19 on the sector.

Victoria’s Secret was very successful until 2016 when it started losing market share. This can be attributed to several factors. Whilst its marketing strategy of ‘sexual marketing’ worked in the past, consumer ideals have changed over time with more emphasis on diversity, inclusivity & body positivity. This led to a disconnect between customers and the brand.

Changing fashion trends are also a reason for the loss in sales for Victoria's Secret such as the rise in athleisure. With a growth in the Sports bra segment and its use day to day, even if consumers were not heading to the gym, there was less need for consumers to purchase Victoria’s Secret’s main product lines.

Finally, a shift online in the retail space with less traction on the high street/shopping centres has led to falling sales. With many of Victoria’s Secret stores located in shopping centres worldwide, the drop in foot traffic with consumers preferring to shop online impacted its sales. All the above combined led to a less enjoyable experience which in turn caused consumers to shop at its competitors that offered a greater range of sizing options.

With Sycamore’s Partners expertise in the consumer & retail sector and experience in turning around struggling companies, the implementation of cost-efficient measures and a change in strategy would have likely been successful and improved the fortunes of Victoria’s Secret. In the past, it has split off various entities within businesses, selling any valuable assets and reduced costs not only through improving efficiency but by acting as an intermediary between fashion retailers and their suppliers (MGF Sourcing).

For Victoria’s Secret to be successful, it would likely need to change its company image and reputation. The sale from L Brands is a step in the right direction towards rebuilding the brand. This combined with continued activist pressure from Barington Capital for the company to act and address “women’s evolving attitudes towards beauty, diversity and inclusion” would likely lead to a gradual return to its previous success. Sycamore Partners can then choose to exit on their investment in the future after increasing the value of the company.

There is a lot of scope for various cost-cutting initiatives as well as revenue growth through changes in strategy to increase Victoria’s Secret EBITDA. The IRR of Sycamore Partners in June 2019 from all its investments was estimated to be 29.1%. Finding a future potential seller on exit which would meet its required return will not have been too difficult because of the discounted price, making it an attractive buy for a strategic buyer or another financial sponsor.

Risks and uncertainties

Many potential buyers were cautious to work or purchase any subsidiaries of L Brands due to concerns with CEO (at the time) Leslie Wexner and his associations with Jeffrey Epstein. The impact on the brands was significant with L Brands shares falling 40% upon revealing the CEO’s relationship with Epstein. Given L Brands would continue to hold a 45% stake in Victoria’s Secret, it would have caused tension between the two boards if they continued to pursue litigation. This would have been costly and likely undo any benefits L Brands would have reaped from this transaction such as paying off their debt.

Further, the tension between L Brands and Sycamore Partners if the deal went ahead would likely impact operations, decision making and strategy which would likely reduce the effectiveness of any measures in place for turnaround.

There are also concerns over whether Victoria’s Secret can ever return to its levels of previous success. The Fashion industry is dynamic and consumer preferences have constantly shifted from ‘fast fashion’ years ago to more recently ‘athleisure’. Though Victoria’s Secret has tried adapting through the release of a sports line to compete with the likes of LuluLemon, Nike and Under Armour as well as the reintroduction of its beauty line, it remains to be seen whether this will solve its problems and satisfy evolving consumer preferences.

“We are confident that today’s announcements will position the company (L Brands) for future success.”
James A. Mitarotonda, Chairman and CEO of Barington Capital


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