American Apparel (AMEX: APP) is working with advisor Rothschild to help it explore a potential sale, as the company contends with a falling stock price and the threat of bankruptcy, three sources familiar with the matter told peHUB.
American Apparel CEO Dov Charney did not respond to a request for comment.
Two of the sources said 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.
One source who is working with a potential American Apparel buyer says Charney has been buying stock in American Apparel, which has seen its share price plummet following the revelation on March 31 that it faces bankruptcy. American Apparel’s shares were trading for 82 cents on Tuesday, down from a 52-week high of $3.62. Its market cap is just under $64 million.
It is believed Charney controls more than 60% of the company now, although recent reports peg his ownership closer to 54 percent. Charney has been converting his American Apparel debt holdings to equity, according to the source working with a potential buyer.
The source said American Apparel’s creditor, Lion Capital, hired Miller Buckfire in anticipation of any significant event that pushes the company closer to a Chapter 11 bankruptcy filing. Lion Capital recently removed its two directors, Lyndon Lea and Neil Richardson, from American Apparel’s board.
The potential sale comes in stark contrast to comments made by Charney earlier, after initial reports of American Apparel’s bankruptcy concerns surfaced last week.
The company’s annual report, filed with the SEC on March 31, included several statements in bold lettering in its Risk Factors section, including, “If American Apparel is unable to successfully implement steps to improve its liquidity position, it may need to voluntarily seek protection under Chapter 11 of the U.S. Bankruptcy Code.”
The annual report also stated: “As a result of operating losses and negative cash flows from operations, together with other factors, including the effect on our ability to borrow under our revolving credit agreements as a result of the “going concern” qualification with respect to our 2010 financial statements, we may not have sufficient liquidity to sustain operations and to continue as a going concern.”
On Tuesday, Charney was interviewed by Counselor magazine and also issued a statement in which he declared that “there’s no chance this industry has to worry about me, or American Apparel, leaving.” He asserted the the statement about the possibility of bankruptcy in the company’s annual report was “something we did as an obligation to shareholders… To say that the company is unstable is not accurate,” he said.
Even if American Apparel avoids bankruptcy, Charney will have other difficulties to face. He’s being sued for sexual harassment, which is separate from the sex slave allegations made against him.
Charney brought American Apparel public after agreeing in late 2006 to merge it with special purpose acquisition company Endeavor Acquisition Co.
Luisa Beltran contributed to this report.Get your FREE trial or subscribe now to Buyouts to find new deal opportunities, super-charge your fundraising efforts and track top managers.Get your FREE trial or subscribe now to Buyouts to find new deal opportunities, super-charge your fundraising efforts and track top managers.