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L Brands Explores Alternatives as Barington Approaches

By Ronald Orol

L Brands Inc. (LB) CEO Les Wexner is reportedly in talks to step down from his role at the same time that the Victoria’s Secret owner is exploring strategic alternatives for the lingerie unit.

The Wall Street Journal, citing sources, said discussions are ongoing and could result in a full or partial sale of Victoria’s Secret.

The Deal reported in November, citing sources, that L Brands was meeting with investment bankers about potentially considering strategic alternatives.

A standstill agreement reached in April between the lingerie company and activist investor Barington Capital Group LP’s Jim Mitarotonda is set to expire in February. The agreement ended a pending private proxy contest and brought on two new company-chosen woman directors, including Anne Sheehan, ex-director of corporate governance at the second-largest U.S. pension fund. Also, Mitarotonda, who in March urged L Brands to separate its Victoria’s Secret unit from its Bath & Body Works retailer, received a position as a special adviser to the company.

Barington could launch a director fight by a March 17 deadline for nominating directors if Wexner doesn’t step down from his CEO post or if L Brands doesn’t take steps to consider auctioning off one or both retailers. Barington has launched 51 campaigns and 24 proxy contests, many involving retailers, since 1997, according to FactSet.

If Wexner does step down and L Brands is successful in auctioning off its Victoria’s Secret chain then it demonstrates that Barington has achieved a lot without a public proxy fight.

“This appears to be a major shift in company strategy, and a paradigmatic change in governance and board composition ” said Lawrence Elbaum, partner at Vinson & Elkins LLP in New York. “It didn’t take a proxy fight to arrive at these results. This is the alternative that we are now seeing more often to an acrimonious public fight where resolution and value for shareholders can be achieved peacefully.”

Elbaum added that there could be a war going on inside the boardroom to get to the result, but from his perspective, the situation looks like proof that there are hedge fund activists that can work with companies without resorting to “street brawl type tactics.”

CNBC reported in November that L Brands board was considering a Victoria’s Secret spinoff that would keep Wexner in power or a PIPE financing transaction that would manage the company’s liabilities.

Wedbush analyst Jen Redding said in a Jan. 29 note that an exit for Wexner, following 57 years as CEO, would be a step in the right direction but that a spinoff probably wouldn’t make sense.

“While we initially do not feel that a spinoff is the right course of action, and that conflict of board loyalty is a sideliner for us, we view the discussion for LB CEO Les Wexner to step aside as CEO (while remaining chairman) as a step in the right direction for both VS and LB as a whole,” she said. “We see a meaningful management shakeup at core VS as just what the brand needs to finally take steps forward in reconnecting with consumers.”

L Brands shares spiked 13% to $23.15 a share on the WSJ report. That strengthens Barington’s position, though L Brands’ stock is still below the $25.68 a share it was trading at in April, when the standstill was struck.

Barington owns 617,800 L Brands shares, or about $12 million worth, according to Factset.

Barington could put pressure on Wexner to resign in light of concerns about his association with Jeffrey Epstein, who died in prison after being charged by federal prosecutors with sex trafficking in underage girls. The concern is that Wexner’s association with Epstein is hurting the company’s brands.

In addition, L Brands has a lot of vulnerable directors, even as it brought on two new directors recently. Governance experts have raised concerns about Abigail Sara Wexner, the wife of the CEO-founder Les Wexner, who sits on the board as a nonindependent director.

In addition, according to relationship mapping service BoardEx, a sister company to The Deal, there several directors at L Brands who could be considered overtenured. Allen Roger Tessler, the lead independent director and chair of the nomination and governance committee, and Raymond Zimmerman have served on the board, respectively, for 33 and 36 years and are 83 and 88 years old.

L Brands board has staggered elections, though Zimmerman’s seat is up for election at the 2020 annual meeting. Tessler and director Gordon Gee, who has a long-lasting relationship with Wexner, is up for election in 2021.

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