Hedge fund to give American Apparel a lifeline
American Apparel Inc. is getting a financial lifeline from its largest shareholders in an agreement that could leave founder Dov Charney out in the cold.
The Los Angeles retailer has signed a deal that will bring in up to $25 million in cash from New York investment firm Standard General, enabling the company to avert bankruptcy, pay off an insistent creditor and bring in new leadership to help manage the struggling operation.
Charney, ousted three weeks ago as chairman and chief executive amid allegations of misconduct, will remain with the company as a strategic consultant until an investigation into his behavior is concluded, American Apparel and Standard General said in a joint statement Wednesday. Only then will a committee of board members decide whether he can work at the retailer as chief executive or in any capacity.
Standard General, which controls a nearly 44% stake in the company through a cooperative buying arrangement with Charney, has said it wants to save a company with a great brand and keep its manufacturing in the U.S. But the hedge fund has emphasized that it has no allegiance to Charney.
“The underlying brand is quite strong, the sales have been strong,” said David Glazek, a partner at Standard General, which invests money for pension funds and wealthy individuals. “But the series of crises, which in isolation looks one-off, sucked up both liquidity and management time.
“If you get a moderate period of stability, the business is going to do quite well.”
Standard General initially appeared to be in Charney’s camp, but Wednesday’s deal will ally Standard General even more closely with the troubled American Apparel, which employs 10,000 workers and operates about 260 stores worldwide.
“If you want a double-or-nothing proposition, you go with American Apparel,” said Ronnie Moas, founder of Standpoint Research, a market research firm.
American Apparel is facing a slate of financial problems. It has lost nearly $270 million in the last four years and is more than $200 million in debt. In March, it sold $28.6 million in stock to meet debt obligations. The company will owe bondholders $13.5 million in interest in October.
But Moas said he thinks the smart money is betting on the company making a comeback.
“These people putting up $25 million are not stupid,” Moas said. “They see an opportunity to double, triple, quadruple their money over the next five years.”
Under the agreement, American Apparel will get up to $25 million from Standard General that will enable the company to pay off a looming $10-million loan from lender Lion Capital. On Monday, Lion formally demanded repayment, citing a provision in its lending agreement that allows the loan to be called in early if Charney stops working as chief executive.
The board will be overhauled, with only David Danziger and Allan Mayer remaining; they took on the role of co-chairmen after Charney was voted out. Standard General will choose three new directors, and two additional members will be chosen jointly by the retailer’s current board and the investment firm.
Standard General also plans to help the company improve operations, including investing more in e-commerce and expanding stores both domestically and internationally, Glazek said.
The agreement includes protections to prevent Standard General from amassing more control by prohibiting it or Charney from buying additional shares and limiting their vote to no more than one-third of the company’s shares on any issue put before stockholders. The remaining shares would be voted in proportion to how other shareholders cast their ballots.
Standard General said it is committed to America Apparel’s made-in-the-U.S. model. The retailer employs about 4,500 workers at its downtown Los Angeles factory. The firm is against shipping even a percentage of manufacturing out of the country, Glazek said.
“We’re strongly committed to keeping the business in Los Angeles,” he said. “The fact that the clothing is made in downtown Los Angeles is a key part of the brand identity.”
But observers say American Apparel may have no choice.
“If they can pull this off and keep the jobs in this country, that would be nice,” Moas said. “But when push comes to shove, if they get squeezed … they will have no other choice than to look at the expense side of the business.”
Charney is another wild card.
The board voted out Charney as chairman and CEO on June 18 pending an investigation into “alleged misconduct.” The vote immediately suspended him as CEO, but a 30-day wait was required before he could be fired.
The company was already investigating allegations against him, including misuse of company funds and apartments and allowing the posting online of nude photos of a former employee who was suing him.
That investigation, handled by FTI Consulting Inc., will continue. An independent committee of new and old directors will oversee that investigation. Charney’s return to the company hinges on the outcome of the investigation, and he has agreed to cooperate.
Charney has displayed a willingness to do everything it takes to get back into American Apparel.
He sparked an intricate series of countermoves that forced the company to adopt a poison-pill plan designed to discourage a hostile takeover.
His attorney, Patricia Glaser, has also filed an arbitration petition alleging wrongful termination, retaliation and other issues. That process has been put on hold as part of the agreement with Standard General. Charney declined to comment.
After his ouster, Charney reached out to Standard General to buy more shares. The firm was already interested in the retailer, a person familiar with the matter said, and struck a deal with Charney that came with several strings: Standard General would take control of Charney’s shares and could not guarantee his return to the company.
Standard General bought 27.4 million shares in American Apparel about two weeks ago. Under its agreement with Charney, it bought the stock then lent Charney nearly $20 million to buy the shares himself, with the loan carrying a 10% annual interest rate.
Last week, after Lion Capital threatened to demand repayment of its loan, Standard General said in a letter to investors that it was in discussions with American Apparel to shore up its management and finances, and “restore the company to health.”
The investment firm said its deal with Charney is not “an endorsement of him.”
Industry experts say American Apparel may benefit from untying itself from Charney, who has always served as the public face of the company.
“American Apparel the brand got punished for being so closely associated with the ego of its founder,” said Anne Olderog, director of brand consulting firm Vivaldi Partners Group. “The best way forward is to build a brand independent of the founder’s name.”
Twitter: @ByShanLi
