L Brands (NYSE:LB) was having a brutal time of it before the pandemic and things certainly haven’t gotten better. When last I wrote about L Brands stock, it was preparing to sell most of its prime asset, Victoria’s Secret, to a vulture capitalist.
Stefan Kaluzny of Sycamore Partners was the vulture in question. He has a long track record of squeezing the last ounce of cream from failing milk cows. His investments include names like Talbots, Nine West, Belk, Aeropostale, Jones New York and Staples. Belk is now the exclusive outlet for what was L Brands’ flagship store, The Limited.
Now it seems Victoria’s Secret is so ripe the vulture has indigestion. Women’s Wear Daily reported last month that Kaluzny wanted out of the deal. That has now been confirmed.
The Scandal, the Virus, and L Brands Stock
As April 24 dawned, L Brands had a market cap of $2.94 billion on trailing year sales of about $13 billion. Since the coronavirus pandemic hit the shares are down 60%.
The pandemic closed the group’s stores, including Victoria’s Secret, which was valued at $1.1 billion in the original deal. Kaluzny would have paid $525 million for 55% of the chain.
Sycamore now claims in a lawsuit that L Brands breached covenants in the transaction. This sent L Brands stock down by 25% in less than an hour.
The breached covenants refer to the virus. The pandemic has forced the company to close not only Victoria’s Secret stores, but Bath & Body Works as well. Even eCommerce operations were halted so it could produce soap and hand sanitizer.
The sale was originally a way for L Brands to get out from under the Jeffrey Epstein scandal and the #metoo movement of which it was a part. Society has moved away from any portrayal of women as sex objects, and this was killing the company. The hope was that by selling half the chain for cash, Bath & Body Works could show its value.
Founder Les Wexner, who made Epstein a financial advisor, bought Victoria’s Secret for just $1 million in 1982. He is still worth $4.1 billion, but that’s down from $7.7 billion in 2015.
What Happens Now?
L Brands has counter-sued Sycamore, calling its effort to get out of the deal “pure gamesmanship.” It insists Sycamore knew about the virus when Kaluzny signed off on the deal.
Analysts seem behind the curve on this story. Telsey Advisory Group reportedly had L Brands listed as a “market perform” on April 13, saying it was worth $13/share. Most analysts are neutral on the stock.
They shouldn’t be. It’s clear from action in the company’s bonds. Bonds with a coupon rate of 6.95%, which expire in 2033, were recently trading in Germany at 53 cents. The bonds were trading at 95 cents as recently as early March. The company’s 2023 bonds, which were trading at $1.09, are now at 85 cents.
What this tells me is that sophisticated investors see a large likelihood of default.
The Bottom Line
When a company goes under, common stockholders only get the residual value of the asset. They come after all other creditors have been paid.
There are many great retail names that won’t get through this pandemic. JCPenney (NYSE:JCP) is expected to join Nieman Marcus in bankruptcy any day. Other big merchants, like Macy’s (NYSE:M), Kohl’s (NYSE:KSS) and Nordstrom (NYSE:JWN) may go under if the crisis continues into 2021.
Vultures like Kaluzny, who like to load up chains with debt, take profits, then declare bankruptcy, may soon find it’s game over.
There are going to be a lot of store liquidations. Shoppers are the ultimate vultures.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
