American Apparel Inc. will get $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, a person familiar with the matter said.
Under the pact, Standard General will add three board members to American Apparel and two other directors will be chosen mutually, said the person, who asked not to be identified because the deal hasn’t been made public yet. Co-Chairmen Allan Mayer and David Danziger will be the only current directors staying on American Apparel’s seven-member board, according to the person.
The financing deal gives 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 pushing for his return, though.American Apparel’s new board will decide the future role that Charney plays in the company, the person said.
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 Los Angeles- based company posted about $270 million in net losses since 2010 and has been forced to raise capital several times to meet its obligations.
The current board is expected to approve the Standard General deal as soon as today, according to the person. Standard General, based in New York, will supply one director itself and choose two others, with the changes taking effect in the next few weeks, the person said. The company will also continue to rely on domestic manufacturing for its T-shirts and other clothing -- a selling point for the retailer.
Mike Sitrick, a spokesman for American Apparel, and John Dillard, a spokesman for Standard General, declined to comment.
American Apparel shares rose 1.4 percent to 85 cents at 1:36 p.m. in New York. The stock has lost more than half its value over the past year, though 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. and $210 million of bonds.
Those 13 percent secured notes due in April 2020 have risen 10 cents to 99.75 cents on the dollar since Charney left the company, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities climbed 0.5 cents at 9:38 a.m. in New York today.
In March, the chain 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 shareholder’s 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.
Charney’s future with the chain remains to be seen. The sides agreed that he will only have the chance to return if the new board wants him back, the person said. The current board has an ongoing investigation into his actions, trying to find more evidence and build a stronger case for replacing him.
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 said. The company has since enlisted FTI Consulting Inc. to investigate Charney further and plans to make the results public at some point. A lawyer for Charney has said the board’s reasons for firing him are baseless and that his ouster was illegal.
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 familiar with the situation said.