Sycamore - L Brands Deal Break?
Found this story very interesting today. Link below.
Sycamore trying to argue that by delaying rent and furloughing workers, L Brands violated the ordinary course clause of the merger agreement. To be clear, it doesn't appear they are arguing material adverse effect (maybe throwing it in there, but not their primary argument).
Here's my question: isn't ordinary course designed to prevent neglect of the business during the pre-closing period? This would seem the opposite. L Brands is retaining 45% ownership post-deal, and clearly taking these measures to preserve value.
I've seen enough Delaware judges speak at conferences to know that spirit of the law matters to them. My sense is, they wouldn't buy this argument from Sycamore. Curious what others think.
It sounds like the language in the agreement had specifically excluded a pandemic from being an MAE, and so Sycamore is approaching their argument using language technicality rather than a rationale frame of mind. My understanding is that their argument is something like if you're going to define a pandemic as being within the confines of ordinary course of business, we are going to argue that furloughing / not paying rents are by definition not in the ordinary course. If that's the case, my opinion is that it's kind of an unfair interpretation as per your point, the Company's actions are obviously value-preservative, but the question is then whether or not "ordinary course" stretches to accommodate tailored exceptions to what is an MAE.
Presumably there's more complexity to it, but it'll definitely be interesting to see how this plays out and what ramifications this might have if Sycamore wins.
Somebody read their daily dose of Matt Levine today lol
Don’t the terms explicitly exempt pandemics from constituting a material adverse effect?
Yes. But separate from MAE, is another clause that says you must operate the business in ordinary course pending closing. They are trying to say these furloughs and rent non payments are in violation of that.
From a common sense standpoint they’re clearly full of shit, but wondering if they still have a chance of using this argument to get a renegotiated price.
Good comments so far, thanks.
Spoke to someone familiar with the situation who has a lot of M&A law experience, and he said in his mind its a tossup. On the one hand, he agrees with all the comments here that there's not a clear argument for Sycamore to make. "Ordinary course", he said, never meant that you wouldn't do unusual things in unusual times.
On the other hand, he feels anything can happen since it's so unprecedented.
you are the only person i have ever seen use wall street oasis as an attempt to pass off doing real work. do you not have access to a bloomberg and sellside research? go do actual work instead of trolling on forums 24/7.
You and LBObuyout are just obsessed with me lately. Not sure what the deal is.
Also where are my event picks man? You keep ignoring me on this. This very thread is an event thread, least you could do is share some wisdom.
precedent is obviously important in law, and with all that’s going on the norm is to be more lenient, understanding, etc. than typical - but the question is to whom favorable conditions better for? for everyone involved except l brands, staying with l brands is probably better in the long run.
my question is about social repercussions and precedent- while sycamore may save a material ~x millions of dollars, what do they lose in those who will want to work with them (in addition to withholding rent payments for Staples). TBH, for a company with this reputation (seen media report hated ‘financial engineering’ as well) going through with this deal and trying to preserve value for themselves (furloughs, not paying wages like others might, etc) would ruin their reputation, kind of like what happened with Elliot management. difference is sycamore doesn’t have turnaround or control expertise do they? don’t really know the fallout of Elliot though- did it have a material impact in the company? do they have operations expertise that they can become a turnaround operator, IDK.
best thing that can happen for everyone is for them to be able to pull out of the deal and in the hands of a company who’s brand is actually somewhat accountable and will have to care more for workers than Sycamore. On a legal front I think it will come down to the judge, it’s a very strong case on both sides I think because this is unprecedented in nature even if not uncovered in strict legal terms.
Sycamore is a turnaround fund look at their investor docs they pay 5-7x ebitda. Here's a direct quote from their investor docs:
"Sycamore’s deep value approach focuses on situations where it can add and create value by acquiring underperforming companies at attractive valuations and grow revenues and earnings. The investment approach aims to generate attractive investment returns with an asymmetric distribution of potential outcomes by protecting the downside through attractive purchasing and increasing upside potential through a data driven operating plan for profit improvement."
Sycamore is ruthless. Don’t get me wrong, they have a great track record of returns. But everyone VP+ there is an absolute douche. They have such a cutthroat culture with some of the most psychotic seniors I’ve ever met.
Well they did it. Not sure why LB pussied out on forcing a deal after legal experts widely agreed that Sycamore would have a tough argument here. Fed action helped a bit but still suspicious. Almost like Sycamore dug up some personal dirt on someone
Fair, that or they didn't want to have a majority equity holder who doesn't want to own them - could cause all kinds of issues. Most likely identified another funding source (albeit likely a more painful one) and pulled the plug. I'm guessing they negotiated some settlement of the break-up fee out of Sycamore as well.
Interesting point on settlement, I’d think that needs to be disclosed but not 100% on that.
You’re def right about not wanting that kind of partner. Imagine being able to get out of bad deals just because people don’t want to think about you again. Well played by S
Neither side is reportedly paying a termination fee
I’m not an expert on M&A law and I won’t pretend to be, but it’s a cool thought experiment that I’ll wade into nonetheless. Essentially Sycamore is taking a stern interpretation of the non-MAE consideration with respect to COVID-19, and applying it in other contexts to eventually conclude that L Brands is laying off workers despite “positive” conditions. It seems like any sane judge would instead look at this and conclude that L Brands is simply laying off workers in the face of a revenue decline and are therefore operating within the ordinary course of business as you rightly pointed out.
with that being said, with all the lolly gagging and bullshitting going on, along with the wide scope of the interpretations available given the COVID-19 crisis, I wouldn’t be surprised if Sycamore pulled a rabbit out of the hat and forced L Brands to reconsider.
I also wouldn’t be surprised if Lex Wexner caved in from the liquidity pressure and accepted a bid at a lower price. I mean VS is a great brand, but it’s apparent moat looks increasingly pressured with all of these fast fashion lingerie pop ups and plus sized model obsessions going around
You called it, they managed to weasel out.
Any guess on how this affects other buyer's remorse situations? Taubman (TCO) has actually traded up since the LB announcement.
follow the money. cash strapped sellers are always gonna prefer the cash now than be bankrupt later and sign offers at lower prices. BorgWarner deal is a case in point, Boeing / Embraer, for fuck sake even thyssenkrup elevator deal is in question and that’s a trophy asset with PE dry powder behind it... if BX/GIC come back in the mix they’re gonna laugh all the way to the bank getting that asset at a lower price
also for HF, I wonder how many lawyers are coming out of the wood work to advise on merger arb bets with these kinds of deals.
cheers!
Are you actually Indian or is that just a random guy on your profile picture?
Just a guy. Not sure he’s even Indian
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