After my recent lambasting of private equity’s healthcare track record during the coronavirus pandemic, here’s a story concentrating on the fluffiest of investments. It’s also quite a nice instance of how private equity’s much-touted business regeneration credentials stand up in practice – and how private equity owners are likely to react under the stress of the crisis.
As widely reported, Sycamore Partners is trying to back out of its US$525 million commitment to buy a 55% stake in L Brands, owner of the Victoria’s Secret lingerie and beauty chain, as well as the PINK and Bath & Body brands.
The deal was originally concluded in February before the coronavirus crisis hit. However, Sycamore is now claiming that L Brands has violated the investment agreement terms to “conduct the business in the ordinary course consistent with past practice”. Violations cited include furloughing workers, shuttering stores, retaining old inventory, and other measures due to the pressure of Covid-19, the disease caused by the coronavirus. Sycamore’s lawyers are arguing that the usual act of God clauses in takeover agreements do not cover L Brands’s actions.
“While we acknowledge that the Covid-19 pandemic is an international tragedy and health emergency, we are equally certain that it does not excuse the performance of L Brands’ obligations under the transaction agreement,” Sycamore President Stefan Kaluzny wrote in a letter to the company.
Really? A neutral observer might reasonably ask what else could L Brands do? Also, what did L Brands do that other consumer firms – including those owned by private equity funds – aren’t already doing?
If the kind of moves that L Brands made are claimed by Sycamore to make the asset uninvestable, then what does that say about the viability of the private equity-owned brands that are acting similarly? Shouldn’t their limited partners ask for an immediate reassessment and revaluation of those investments, and indeed, of all the consumer brands in the portfolios of private equity firms?
And if this is any indication of private equity’s readiness to share the burden and take the strain of the crisis, then are private equity firms really entitled to the government support they’ve been lobbying so hard for in the US? Or to regulatory leeway when large mergers and takeovers are concerned? Or to any sympathetic hearing when they claim to be good corporate citizens, sharing the general burden of the crisis?
It looks to me like private equity’s claims and pretensions are as flimsy and transparent as any Victoria’s Secret negligee.
