American Apparel Inc. (APP) will get as much as $25 million from investor Standard General LP in an agreement that shakes up the board and lets the struggling retailer pay off a $10 million loan.
Under the agreement, Standard General will choose three board members for American Apparel, and two other directors will be chosen mutually, the Los Angeles-based chain said yesterday in a statement. Co-Chairmen Allan Mayer and David Danziger will be the only current directors staying on the seven-member board. Bloomberg reported details of the pact earlier.
The financing deal provides a lifeline to the unprofitable retailer after the ouster of founder Dov Charney, who had served as American Apparel’s chairman and chief executive officer, and a demand by creditor Lion Capital LLP to pay back $10 million in debt.
Charney allied himself with Standard General, giving the hedge fund control of his stake and voting rights. The investment firm isn’t publicly pushing for his return, though. Charney’s future with the company will be decided by a committee on the reshaped board that includes Danziger, a Standard General executive and one joint designee. The agreement set a target of completing the investigation into Charney within 30 days.
The clothing chain was in turmoil well before last month’s removal of Charney, who has faced sexual-harassment lawsuits and drawn controversy for provocative advertising. The company posted about $270 million in net losses since 2010 and has been forced to raise capital several times to meet its obligations.
Standard General, based in New York, will supply one director itself and choose two others. Those changes will take effect in the next few weeks, said a person familiar with the situation.
The agreement also stipulates that Standard General is committed to keeping the manufacturing for its T-shirts and other clothing in the U.S. -- a selling point for the retailer.
American Apparel shares rose 1.1 percent to about 85 cents in New York yesterday. While the stock has lost more than half its value in the past year, it’s up more than 30 percent since Charney was pushed out.
The $25 million in new capital would let the company cover the Lion loan and provide a financial cushion. Paying off Lion also would ease the threat of the chain defaulting on the rest of its debt, including a $50 million credit line from Capital One Financial Corp. (COF) and $210 million of bonds.
Those 13 percent secured notes due in April 2020 had risen 10 cents to 99.75 cents on the dollar from when Charney left the company through yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
In March, American Apparel generated about $30 million in a stock offering so it could cover an interest payment on its bonds. That cut Charney’s stake to 27 percent from 43 percent. It also reduced the combined ownership of Charney and Lion, his long-time supporter, below a controlling position of 50 percent.
Since being ousted, Charney has fought to win his job back. After failing to hold a special shareholders’ meeting, he turned to Standard General and borrowed $20 million to increase their combined ownership to 43 percent. To get the deal done, Charney ceded control of his voting rights, effectively making Standard General the retailer’s biggest investor.
The board responded to Charney’s moves by adopting a so-called poison pill, which prevents a takeover by diluting shares.
American Apparel’s board served Charney with a termination letter at a meeting last month, following a probe into his conduct. The investigation found he retaliated against a former employee who sued him for harassment and that he misused corporate funds, a person with knowledge of the matter has said. A lawyer for Charney has said the board’s reasons for firing him are baseless and that his ouster was illegal.
The company has since enlisted FTI Consulting Inc. (FCN) to investigate Charney further, and the probe is expected to be completed in a month, according to the person, who asked not to be identified because the talks are private. Until his fate is decided, Charney will continue to receive his base salary as a consultant to the company with no supervisory authority over any employees. His base salary was $832,000 last year, according to company filings.
The sides also have discussed bringing in outside help to run the chain, maybe from a retail consulting firm, said the person familiar.
Lion had a stipulation in its lender agreement that puts its loan into default if Charney is no longer CEO. Standard General’s next step is to engage with Lion to resolve the matter, the person said.