American Apparel Inc (APP) May Seriously Be Considering Buyout

American ApparelAmerican Apparel

American Apparel May Seriously Be Considering Buyout by Todd Sullivan, ValuePlays

Here is the news on the rumored buyout offer from the WSJ:


Updated Dec. 18, 2014 7:27 p.m. ET

American Apparel Inc has been approached by Irving Place Capital about a possible takeover, according to people familiar with the matter.

Irving Place sent an expression of interest to the board of the Los Angeles retailer in the last few weeks, the people said. The board initially rebuffed the approach because the indicative price was too low, they said.

Irving Place has since increased the price range to $1.30 to $1.40 a share and the board has yet to respond to the second approach, they said.

American Apparel’s shares jumped 45% to $1 on the news which was first reported by the New York Post.

The takeover approach came before the board this week the employment of founder Dov Charney , who was suspended as president and chief executive by the board in June for alleged misconduct. Paula Schneider was named to succeed him as CEO.

American Apparel has struggled with falling sales and swelling losses. In the three months through Sept. 30, the company lost $19.2 million, compared with a loss of $1.5 million a year earlier. Sales fell 5% to $156 million from a year earlier.

In July, hedge fund Standard General agreed to invest $25 million in the retailer, part of which American Apparel used to pay off a loan.

Standard General controls nearly 44% of American Apparel shares, a stake amassed through a deal with Mr. Charney that essentially gave the hedge fund voting control over Mr. Charney’s shares.

The board rejected the first one but has not yet responded to this one.

From the Q3 10Q:

Liquidity and Capital Resources

As of September 30, 2014, we had $9.4 million in cash, $27.0 million outstanding on our $50.0 million asset-backed revolving credit facility and $20.4 million of availability for additional borrowings under the facility. As of November 3, 2014, we had $8.4 million of availability for additional borrowings under the facility.

We and Standard General Group (“Standard General”) are in the process of negotiating a $15 million unsecured credit agreement between one or more entities affiliated with Standard General and one or more of our foreign subsidiaries as borrowers. We expect to enter into this credit agreement in the fourth quarter of 2014.

The company has 8 business days to complete this transaction in Q4.  This isn’t a particularly hard deal to get done either, the credit is coming from the largest shareholder and a current creditor who has board representation so there can’t be any “due diligence” delays, what can’t they possibly know?  There isn’t any real reason that this agreement that has been on the table with the terms made public(Q3 10Q pg 47)  for a over a month now hasn’t been finalized…..

Unless a new owner might not want it or might want to provide it themselves? If the article above is correct Irving may have reached out to American Apparel Inc in November (not long after Q3 results were released and the credit agreement disclosed) and there may have been discussions ongoing since then. That certainly would explain why APP has not entered into it.  If that is true it would also mean management is taking the overtures very seriously.

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About the Author

Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.

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