L Brands will see a boost by taking Victoria’s Secret private, but Bank of America wanted a ‘clean break’

Victoria’s Secret has been taken private, which Bank of America says will leave L Brands Inc. on much stronger footing with a stand-alone Bath & Body Works.

Calling the beauty chain “one of the best growth stories in retail,” Bank of America analysts led by Lorraine Hutchinson reiterated their buy stock rating for L Brands and the $30 price objective.

L Brands LB, +0.41% announced Thursday that it is selling a 55% stake in Victoria’s Secret, including the Pink brand and Victoria’s Secret Beauty, to Sycamore Partners for about $525 million. L Brands will retain a 45% minority stake. Victoria’s Secret has an enterprise value of $1.1 billion under terms of the transaction.

The news confirmed previous reports from The Wall Street Journal.

Analysts say Bath & Body Works is poised to grow its sales and earnings while freeing itself of $2.5 billion in lease liabilities for Victoria’s Secret, which had 1,111 stores in the U.S. and Canada as of November 2019, including the Pink business.

L Brands plans to use the proceeds of the deal along with about $500 million in excess balance sheet cash to pay down debt.

“While our best case scenario included a clean break from the struggling Victoria’s Secret brand, we think today’s transaction will create shareholder value,” wrote Bank of America.

L Brands has grappled with declines at Victoria’s Secret due to shifting consumer tastes that have moved away from the sexy marketing and merchandise Victoria’s Secret is known for.

Victoria’s Secret third-quarter 2019 sales fell to $1.41 billion from $1.53 billion the prior year. Meanwhile, Bath & Body Works sales grew to $1.06 billion from 956.2 million the previous year.

For the fourth quarter, L Brands expects a 2% comparable sales decline, including a 10% increase at Bath & Body Works and a 10% decrease at Victoria’s Secret. L Brands still expects fourth-quarter earnings per share of $1.85, ahead of the FactSet consensus for $1.83.

“Owning Bath & Body Works will be close to a pure-play,” Bank of America said.

“We think Sycamore could turn Victoria’s Secret by overhauling the brand image and marketing message, adding back swim and selling the loss-making international business.”

Bath & Body Works represents about 80% of L Brands’ operating income, notes Moody’s vice president Christina Boni.

“The transaction combined with cash on its balance will result in estimated debt reduction of approximately $1 billion and mitigates the risk associated with the turnaround of the Victoria’s Secret business,” she said.

In addition to the transaction, L Brands announced that L Brands Chief Executive Les Wexner will step down from his post when the deal closes, staying on as chairman emeritus.

Wexner, who has been at the helm for 50 years, has been embroiled in controversy through his association with his former money manager, Jeffrey Epstein.

Andrew Meslow has been promoted to chief executive of Bath & Body Works. He’s currently chief operating officer. And Nick Coe has been named vice chairman of Bath & Body Works. He’s currently chief executive officer.

L Brands has also extended its agreement with Barington Capital Group, which will continue to serve as a special adviser to the company. The activist shareholder group built a stake in the company and then urged it to spin off Victoria’s Secret or take Bath & Body Works public.

L Brands shares have inched up 0.8% in Thursday trading, but have fallen 10.8% over the past year. Shares have soared 54.3% over the past three months.

The S&P 500 index SPX, -0.95%  has gained 20.7% over the last 12 months.

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