How A Bunch Of Canadians Saved Dov Charney

A coalition of Canadian investors has rescued American Apparel from bankruptcy. Time to break out the celebration cocaine!

Under the terms of the deal, which is expected to be announced today, a bunch of rich Canucks will give Dov Charney $15.2 million. (Dov is ponying up $700,000 of his own money, said to be his last savings, to bring the total immediate investment to $15.9 million.) American Apparel discounted the price of the shares the investors will acquire to 90 cents; American Apparel closed at $1.24 yesterday. The deal also gives the Canadians warrants to acquire up to another $27 million worth shares, also at 90 cents apiece, any time in the next 180 days.

The group of investors is led by a formerly high-flying ice cream entrepreneur Michael Serruya.

This is the second time American Apparel, which lost $86.3 million last year, has been saved from imminent bankruptcy. In 2009, private equity group Lion Capital loaned American Apparel over $80 million; American Apparel's debt has since ballooned to over $140 million, and bankruptcy fears were stoked when the company finished the month of February with only $5 million in cash on hand, and published an annual report that made liberal use of the words "insolvent" and "Chapter 11" and "no longer a going concern." And the deal was controversial: The Post reports that it almost didn't make it past American Apparel's board, because "some directors expressed doubts whether the rescue financing was just a band-aid that could leave the company's finances vulnerable to deteriorating further before going bankrupt." Translation: At least some of the board believes that Dov Charney is a terrible C.E.O. whose management has caused the company to haemorrhage money.

According to Women's Wear Daily, under the terms of the new deal, "Lion Capital, American Apparel's largest lender, now holds additional warrants for about 32 million shares, also at a below-market price."

Any large-scale conversion of warrants to shares would dilute Charney's shares in the company to below 50 percent, noted sources. However, Charney could regain majority control via stock options that vest at certain prices over the coming years.

Specifically, notes the post, "Charney's options will vest if the company's stock hits $3.25 next year, $4.25 in 2013 and $5.25 in 2014."

So if the company successfully turns itself around, and if the share price rises to those targets, then Dov will be able to retain control. The notion that American Apparel, which has suffered declining year-on-year same-store sales for over two years now, and which flouts its debt covenants and has to seek a waiver either from Lion or from Bank of America (BofA gave it another waiver just today!) practically every month, might be able to hew to that kind of a regular upward trajectory seems highly optimistic. But Dov Charney is nothing if not optimistic. In just that rosy-tinted spirit, we sent Dov a congratulatory text this morning! We'll let you know if he writes back.


American Apparel Gets $15M Lifeline
[WWD]
American Apparel Gets Up To $43 Million In Rescue Financing, Avoiding Bankruptcy [NYPost]
American Apparel Board Said To Approve Financing Of At Least $15 Million [Bloomberg]