Polymathic: Sycamore’s Cold Feet

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Sycamore Partners wants to pull out of its agreement to acquire 55% of Victoria’s Secret from L Brands, a change of heart that has sent L Brands scrambling and shouldn’t come as much of a surprise considering the current situation.

Victoria’s Secret was a struggling ship before coronavirus hit and derailed American retail. At the time of the deal in February, Victoria’s Secret was valued at $1.1 billion. Per L Brands’ last earnings report in February, the company saw losses of $150 million in the quarter on top of $50 million in operating income the year prior. It was a risky bet before, but one that private equity firms had come to embrace. Now, across the industry, no category in retail is as exposed as mall-based retail. Department stores seem set to fall one by one, and mall owners are in rent battles with their tenants. Other leading mall brands, like Gap, have cancelled orders and warned they might default. Victoria’s Secret is no longer just a risky bet; it might be a dead brand walking.

L Brands is challenging Sycamore Partners’ decision to back out of the deal. But regardless of the outcome, the move sets the stage for potential deals around struggling retailers. With another option off the table – private equity acquisition – more of these mall retailers may be forced to turn to bankruptcy. The outlook continues to remain bleak and the retail landscape could look entirely different when we emerge.

By Hilary Milnes

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