Consumer

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Dov Charney's financial backers should think twice before jumping into business with American Apparel's founder and former CEO.

According to a Bloomberg News report Friday, Charney has been talking to several potential financial partners about a bid for the retailer, which is in the final throes of its Chapter 11 bankruptcy protection. Charney later broadcast his plans to evaluate alternatives for the company in a press release:

Mr. Charney is confident that new and existing investors, working with him and his team of industry leaders, would be able to realize significant long-term value for American Apparel's stakeholders, including its thousands of employees, by reviving American Apparel's sales and profitability, while preserving and creating fair wage job opportunities in the apparel industry.

It makes sense that the new investors -- likely private-equity firms -- are interested in the retail chain: It'll have a cleaner balance sheet with no more than $135 million in debt when it emerges from Chapter 11, roughly half what it carried this time last year. And since lenders are set to supply enough financing and capital to fund operations, the company will be well-positioned to turn itself around. That's especially true since since shoppers still turn to the brand for leggings and tees in every color of the rainbow (not to mention black and white). 

Threadbare
American Apparel, now in bankruptcy protection, last posted net income in 2009.
Source: Bloomberg

But why not secure their bet with a leader at the helm that isn't a walking hazard? Sure, Charney has potentially more motivation than anyone else to revive the brand that he created in his Tufts University dorm room in 1989. But he was suspended by American Apparel's board last year and later fired for alleged misconduct including numerous occurrences of sexual harassment and misusing funds. According to American Apparel, he allegedly interfered with the retailer's operations and attempted to sabotage its relationships with vendors and lenders, before a judge granted a temporary restraining order.

Even if that sits well with some private-equity executives, they may have a tough time getting a deal approved by their own investment committees. Some firms are prohibited by their own investors from doing deals in industries such as tobacco, gaming and  pornography. And even though this would be considered retail, executives may have a tough time justifying why they need Charney to be involved. They need look no further than what allegedly happened to hedge fund Standard General, which loaned Charney some $20 million to boost his stake in exchange for his voting rights. In court filings, Charney said he was told by Standard General's chief executive that one of its investors withdrew $300 million as a result of their association with Charney. 

Before the Bottom
American Apparel's shares had flatlined before it entered bankruptcy protection.
Source: Bloomberg

Current CEO Paula Schneider, who came to the brand after stints at Warnaco and BCBG Max Azria, seems like a more digestible choice for private-equity backers, even though she's not exactly loved by all of American Apparel's employees.

Schneider worked as a senior adviser for The Gores Group, a California private-equity firm focused on distressed companies, before transitioning to the role of CEO of a Gores-controlled retailer called Big Strike. There, she led acquisition efforts for the Tracy Evans, 12th Street for Cynthia Vincent and Workshop brands, according to her LinkedIn profile

It's unlikely Charney's fixation on the retailer will abate, but private-equity firms should pursue other avenues if they have their heart set on a deal. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net