Speculation builds over sale of American Apparel

Is American Apparel Inc. up for sale?

The Los Angeles company’s abrupt ouster this week of Chief Executive Dov Charney has sparked intense speculation that it is now a prime takeover target.

But those rumors were vehemently dismissed Friday by its interim chief executive.

“We have zero intention to sell the company,” John Luttrell, who is also the retailer’s chief financial officer, told The Times.

Some industry watchers say, however, that American Apparel’s brand appeal and loyal core of shoppers would make it an enticing prospect for a private equity firm or even another retailer.

“When the board ousted him, it was simultaneously erecting a huge, neon for-sale sign on the company,” said Lloyd Greif, chief executive of Los Angeles investment banking firm Greif & Co. “With Dov out of the way and no longer being an obstacle, this will open the company up to a transaction.”

The T-shirt maker best known for colorful basics and racy advertising saw its shares climb nearly 7% on Thursday, a day after the board suspended Charney pending “an ongoing investigation into alleged misconduct.” The stock edged up a penny to 69 cents on Friday, far below its $15 peak in late 2007.

After its annual meeting Wednesday, the board voted to replace Charney as chairman and terminate him as chief executive, following a 30-day period. A person familiar with the matter characterized the behavior as poor judgment and questionable conduct with women.

Speculation quickly began building that takeover bids were imminent — even if American Apparel wasn’t shopping for a buyer.

American Apparel has retained much of its appeal to youthful urban shoppers, analysts said, despite many eyebrow-raising headlines about Charney’s antics, which have resulted in allegations of inappropriate behavior with employees and multiple harassment lawsuits.

“The strength of the brand is amazing,” said Eric Beder, an analyst at Brean Capital. “You cannot find another company that has gone through what the company has gone through and still survive.”

Brean Capital estimated an offer for American Apparel could come in at about $1.50 a share, which translates into about $500 million with debt.

Analysts said there are several buyout scenarios that could play out.

An investment firm skilled in turning around troubled companies could make an offer. Charney may also look for a private equity firm to back him in his own takeover attempt, or he may ultimately unload his 27% stake to another shareholder interested in owning a controlling share in the company.

“I expect Dov will do everything within his legal rights to get back control,” Beder said. “But if Dov is not going to be there, he will probably eventually sell.”

Greif said an interested buyer would likely look into a prepackaged bankruptcy, where American Apparel would work with lenders taking over the company before filing for bankruptcy.

But American Apparel’s interim CEO said bankruptcy isn’t on the table. “Based upon information available about the company’s performance, it is very difficult for me to understand how anyone could conclude that this company is a candidate for bankruptcy,” Luttrell said.

American Apparel has faced many hurdles in recent years. In 2013, the company dealt with a rocky transition to a new distribution center in La Mirada that pushed costs up. It fought earlier this year to retain its listing on the New York Stock Exchange while buried in negotiations over financing.

Its financial position remains precarious. The company has lost nearly $270 million in the last four years, and has more than $200 million in debt. The company is facing an interest payment of $13.5 million to bondholders in October.

The company also warned that firing Charney could trigger defaults on nearly $40 million in outstanding loans and throw the company into bankruptcy.

Luttrell said the company is in discussion with its creditors.

“It is in the best interest of the lenders to work with us on this,” he said, “I have every expectation they will.”

He acknowledged that the company has faced obstacles. He pointed to a 2010 immigration inspection that found many employees were without required documentation. That prompted layoffs that hurt productivity.

“That made the road rocky for a while and caused us to lose a significant amount of money,” Luttrell said.

American Apparel has spent the last few years building out its infrastructure, strengthening its product and delivery methods, Luttrell said.

“That reflects our ability to improve our overall performance,” he said.

Many analysts agree that the company’s operations have improved. In the first quarter of 2014, for example, American Apparel reported a net loss of $5.5 million, compared with a loss of $46.5 million in the same period a year earlier.

Charney’s ouster was made possible after the company in March sold $28.6 million in stock to meet debt obligations.

Charney’s stake in the company plunged to 27% from the 43% reported last year, according to securities filings.

Greif said the board probably seized on that opportunity to get rid of Charney after his shares were diluted.

“Previously Dov held all the marbles,” he said. “By floating that [stock offering], he went from a position where he clearly had the ability to control to a position today where he is a large shareholder.”

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