Dov Charney Hangs On For Dear Life

With April 30 — the date by which American Apparel warned it might have to file Chapter 11 bankruptcy, if it does not find additional sources of cash — fast approaching, times are getting desperate. Company founder Dov Charney is talking to the press about “social McCarthyism.” The stock price is 81 cents, still well below the minimum $1 per share value the New York Stock Exchange requires listed companies to maintain, meaning that delisting is a concern (again). Rumors are flying about a possible sale — and about Charney’s potential replacement. What’s the latest?

Private-equity blog peHUB hears that American Apparel — and investment bank Rothschild, acting as an advisor — is exploring the potential sale of the company. This is according to “three sources familiar with the matter.” Two of those sources say “if the company is sold, it is unlikely that the buyer will permit Charney to remain with the organization. Charney has been named a defendant in multiple lawsuits, including one from a former employee who alleges that she was Charney’s sex slave.”
American Apparel, however, denies that any sale is in the works. “I’m not surprised that there would be interest in the company, and at times, there has been, but it’s not accurate,” Charney told the Los Angeles Times. “We’re not looking and it’s not going to happen.”
Another rumor has American Apparel working with Rothschild to raise up to $8 million in financing.
American Apparel needs cash in order to meet the terms that govern the $80 millions it owes Lion Capital, a private-equity group that has saved American Apparel from bankruptcy before. At least five times now, Lion has renegotiated the terms of that loan, each time ratcheting up American Apparel’s interest rates. (Dov’s now paying higher interest on those loans than I am on my MasterCard.) Lion has very recently begun, however, to distance itself from its $80 million baby: Two Lion directors just abruptly resigned from the American Apparel board, and Lion co-founder Lyndon Lea was quoted in Women’s Wear Daily as sounding very sanguine about the prospect of an American Apparel bankruptcy: “If they do file, I feel okay. I believe the brand has a lot of value, and it’s more than what they owe me.” Lion clearly feels like it’s in the cat-bird seat.
That his main lenders smell blood obviously can’t make Charney feel too comfortable. To avoid losing control over the company he founded — and if American Apparel again misses the targets for profitability and revenue set out in his loan agreement, and Lion doesn’t agree to renegotiate, Lion has stock warrants it could exercise that could threaten Charney’s majority holdings — Charney has been buying stock. About $2 million, for 1.8 million shares, according to filings. Estimates put Charney’s current stake at between 54% and 60%.
As bNet points out, such sales of new shares dilute the value of existing shares, which further depresses the stock price. Conundrum! As for those rumors that any deal to sell the company or to arrange for new investment would be contingent on Charney stepping aside as C.E.O., getting rid of Charney might not actually be too costly: although his contract entitles him to severance payments, if he’d been fired at the end of last year, Charney would only have been entitled to $750,000.

How’s this one going to shake out? Only time will tell. For now, Charney’s position is tighter than an American Apparel neon lamé thong leotard.