Hedge fund assures investors it has control over American Apparel
The corporate soap opera at American Apparel Inc. has taken another dramatic turn.
Standard General, the hedge fund that appeared to be riding to ousted Chief Executive Dov Charney’s defense, now is portraying itself as American Apparel’s best hope for survival — with or without Charney.
The New York investment firm last week lent Charney nearly $20 million to increase his ownership to 43% of the retailer’s stock, from 27%. That was a key step in Charney’s effort to control the company he founded by installing new directors and, potentially, getting his job back.
But Standard General has quickly moved to quash speculation that the iconoclastic Charney is running the show.
The firm’s executives sent a letter to its investors, which include pension funds and rich people, assuring them that the investment was designed to gain voting control over all of Charney’s stock and “give Standard General the ability to resolve this deadlock and restore the company to health.”
The letter also revealed that Standard General and American Apparel are in discussions to resolve not only the dispute with Charney but also possible defaults on $40 million in debt that may have been triggered when the Los Angeles company’s board booted Charney on June 18.
The hedge fund “is prepared to lend its credibility and capital resources to prevent” the bankruptcy or liquidation that the defaults could cause, the letter said.
American Apparel Co-Chairman Allan Mayer has said the company has the resources to repay the debt if it can’t persuade its lenders to hold off.
Since Charney has given up control of his shares, his future at American Apparel is murky.
Standard General said Charney has agreed to refrain from seeking any leadership role in American Apparel until the retailer’s investigation into his conduct is concluded.
Citing misconduct, Charney’s hand-picked board fired him as chairman and, pending a 30-day suspension period required by his employment contract, would fire him from his chief executive job.
“He will serve no role if he is deemed unfit,” Standard General said in its letter, adding that its deal with Charney is not “an endorsement of him.”
Charney and Mayer declined to comment Thursday. Standard General executives didn’t reply to requests for comment placed Thursday.
For a while, it seemed that Charney’s fight against his humiliating ouster was going nowhere. Then on Monday, his comeback appeared to gain steam when he said a cooperative buying agreement with Standard General had boosted his ownership stake to 43%.
That meant he needed shareholder support representing only about 7% of the stock to pack American Apparel’s board with friendly directors, a plan he told the Securities and Exchange Commission he was in the process of devising.
But his agreement with Standard General came with significant strings, including a 10% interest rate and the promise to give back the 27.4 million shares securing the loan as well as nearly 5 million of Charney’s original shares.
The biggest restriction: Standard General must approve how Charney votes his shares, and the hedge fund made it clear to investors that it would make the decisions.
Wall Street appeared to approve, pushing up American Apparel’s shares nearly 5% to 87 cents. In the last year, the stock has fallen 58%.
One major stockholder apparently has had enough of the drama.
FiveT Capital, the Swiss investment firm that was American Apparel’s second biggest shareholder after Charney, has sold 14.9 million shares, dropping its stake to 3% from about 13%, according to a securities filing.
Standard General said it plans to introduce new directors who are skilled in turning around retailers; the new board also will repair any problems with the company’s management and governance, the letter said.
Standard General said it is prepared to extend its resources to help the retailer avoid its looming debt default, because a potential liquidation of the company — costing 10,000 jobs — “would be a tragedy.”
“I don’t think [Charney] had a choice,” said Antony Karabus, president of Hilco Retail Consulting. “These guys lend you that kind of money, the amount of strings is enormous and they have control.”
Karabus said the hedge fund will play a big role in deciding whether Charney has an indispensable role in American Apparel’s future or if a replacement can be found who will serve as the driving creative force.
Charney certainly comes with a lot of baggage. The controversial executive has been dogged for years by harassment lawsuits and accusations of inappropriate behavior with employees.
The company is still investigating allegations that he misused company funds and apartments, and allowed the online posting of nude photos of a former co-worker who was suing him.
“You can be certain that Standard General looked at this and said ‘What is the end game?’” Karabus said. “The end game is, ‘We don’t want to fight with the board. We want to make a lot of money on the transformation of the company.’”
An alliance between American Apparel and Standard General could ultimately work out for the good of the company by cooling tensions between the board and Charney, and refocusing energy on fixing what ails the retailer, observers say.
“It might be how everybody gets through this and saves face,” said Randy Katz, a partner at law firm BakerHostetler in Costa Mesa who is following the corporate battle closely.
“Dov can come back in but can’t be Chief Dov; the board can stay but can’t smack him around,” said Katz, a securities specialist. “We also have some adult supervision to protect the company and stockholders.”
Standard General, founded in 2007, generally keeps a low profile. The company has bought nearly 10% of troubled retailer RadioShack, but hasn’t made any public demands. Its managing partner, Soohyung Kim, was highlighted last year as a rising star in the hedge fund world by Institutional Investor magazine.
Industry watchers say Standard General’s presence could soothe existing lenders and increase American Apparel’s chances of getting financing in the future.
“If they have some bona fide cash to bring to the table and are willing to make it available to the company, that would increase their likelihood of getting a hearing from anybody else,” said Craig Johnson, president of consulting firm Customer Growth Partners.
But the very public battle over American Apparel may rage on, especially if Standard General is actually acting on behalf of Charney.
Johnson said the investment firm could be serving as a “stalking horse,” a way for Charney to open up a conversation with the board.
So far, sales at American Apparel’s stores don’t appear to be affected, he said. But that could change if the retailer’s designs begin to suffer.
“The average consumer doesn’t have a clue what’s going on,” Johnson said. “But if there is no back-to-school product that shows up, then you’ll see an impact.”
Twitter: @ByShanLi
