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Subs: Soap Opera Update (updated 12pm)

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UPDATE IS # SHARES STANDARD IS EXPOSED TO:

From the WSJ, my take at the end:

A deal that allowed Dov Charney, the ousted chief and founder of American Apparel Inc., to claw his way back to near control of the company, has also put him at the mercy of the investment firm that backed his share purchases.

And that firm, Standard General, is making no promises that Mr. Charney will play a role at the company in the future.

Mr. Charney reached an agreement with Standard General on Friday to buy American Apparel shares from the firm, boosting his holdings to 43% from 27%. But the arrangement also gave Standard General control over Mr. Charney’s stock.

“This transaction is not about the founder, nor is it an endorsement of him,” Standard General said in a letter to its investors. The firm said it has opened a dialogue with American Apparel’s board in the hopes of resolving the conflict amicably.

Mr. Charney entered into the agreement with Standard General because he trusted its judgment and intention to preserve the company’s sweatshop- free manufacturing, a person familiar with his thinking said.

The transfer of voting control was reported earlier by the New York Times.

Mr. Charney has been fighting to hold onto his job since American Apparel’s board stripped him of his chairmanship and moved to fire him on the grounds that he had misused company funds and failed to stop the publication of nude photos of a former employee who had sued him for sexual harassment, among other allegations.

Mr. Charney’s lawyer has called the charges baseless and has filed an arbitration suit to block his dismissal.

A board investigation into Mr. Charney’s conduct, which is being conducted by FTI Consulting, is ongoing and a full report is expected within the next two weeks, a person familiar with the situation said.

“The founder has agreed that he will not serve on the board nor play any leadership role in the company until the process is complete, and he will serve no role if he is deemed unfit,” Standard General said in the letter.

Standard General plans to ask shareholders to approve a slate of directors that it says will provide the expertise necessary to help the company turn itself around.

The firm said it expects the new board to quickly identify a management team that will allow American Apparel to flourish. Standard General said it is committed to keeping the company’s manufacturing in the U.S.

A more immediate issue is the company’s capital structure. Lender Lion Capital has asked that its $10 million loan be repaid by July 4. Failure to pay could trigger a default in a separate credit agreement the company has with Capital One.

American Apparel has said it has the money to repay the loan. But unless it can then raise fresh debt or equity, it may have trouble making bond payments that come due this fall.

This from the Post (consider the source)

American Apparel’s biggest bondholder wants to serve up the company like a snack — a Twinkie, you might say.

Monarch Alternative Capital — the New York hedge fund that helped force the liquidation of Twinkie maker Hostess Brands in 2012 — has been working behind the scenes to force a sale of American Apparel and scrap the clothing brand’s Los Angeles factory, sources told The Post.

American Apparel’s board, which ousted CEO Dov Charney in a surprise coup June 18, has denied it’s considering a sale of the firm and said it won’t veer from the “Made in the USA” policy established by Charney.

But sources said Monarch — whose standoff against Hostess labor unions spurred more than 18,000 layoffs and a sale of its snack brands to a Mexico baking conglomerate — has been aggressively lobbying John Luttrell, the American Apparel exec who has replaced Charney as interim CEO.

A few weeks before Charney’s ouster, sources said Luttrell made a trip to New York and met with bondholders led by Monarch. According to a source close to Charney, the meeting was held without Charney’s knowledge.

At the meeting, Monarch-led bondholders discussed major strategic moves with Luttrell, who was chief financial officer at the time, including licensing out the racy clothing label to a Chinese manufacturer, according to sources close to the situation

On Wednesday, American Apparel officials declined to comment on questions about Monarch.With Luttrell now at the helm, sources said investors working with Monarch in recent days pitched Luttrell on a licensing and distribution deal with Hong Kong-based China Dongxiang, a deep-pocketed retailer.

Reached Wednesday afternoon, a spokesman for Monarch said the firm “supports a ‘made-in-America’ strategy” for American Apparel, and said Monarch execs have had “no discussion with American Apparel or anyone else about an outsourcing strategy.”

The spokesman didn’t comment on whether members of a Monarch-led bondholder group had held such discussions.

Other sources, however, said Monarch has been pressing American Apparel to sell itself and ditch Charney’s strategy to produce clothing in the US since early this year, when it began enlarging its ownership to two-thirds of the company’s $214 million in senior secured debt.

Noting that its two-thirds stake would give it control of American Apparel in a bankruptcy scenario, insiders say Monarch recently has been looking to line up potential acquirers for the brand such as VF Corp., the maker of Lee and Wrangler Jeans; and Iconix Group, a licensing company whose labels include Joe Boxer, London Fog and Sharper Image.

Sources said Monarch began peppering Luttrell and Charney with phone calls after the retailer disclosed last fall that glitches at a new factory were spurring unexpected losses. “I’m rooting for you, Dov,” a Monarch exec told Charney after grilling him about the business, according to a source close to Charney.

Insiders say Monarch execs also have been in contact with real-estate brokers to determine how much cash could be reaped by exiting American Apparel’s factory in downtown Los Angeles, which employs about 5,000 workers. An exit of the factory’s below-market lease could spur a cash windfall of more than $50 million, by some estimates.

 Meanwhile, sources said Monarch has expressed alarm about the deal Charney struck last week with New York investment firm Standard General LP. Charney, who has amassed a 43 percent stake through a loan from Standard General, is angling to retake control of the company’s board by getting the support of a shareholder majority.

Recently, Monarch execs called American Apparel board members to express their approval of Charney’s ouster, sources said.

Standard General has pledged to keep the Los Angeles factory open and central to American Apparel’s strategy, sources said. “[Monarch is] very upset because this kills the quick profits they can make with Charney out of the picture,” according to a source.

Monarch has amassed much of its debt position at prices around 80 cents on the dollar, according to financial sources. Unusually favorable terms on the debt could drive their value as high as 140 cents on the dollar if the company were sold, the sources said.

Last week, American Apparel’s board said it has tapped investment bank Peter J. Solomon as an adviser to ensure it has enough liquidity for upcoming debt obligations, and reiterated that it isn’t pursuing a sale.

According to several sources, American Apparel execs had met in January with Peter J. Solomon bankers, who told them that the company could attract the interest of at least a dozen prospective acquirers if Charney left the company.

Charney wasn’t informed about the meeting, according to a source close to Charney.

So they way to do this is to put yourself in each party’s shoes and see how they might be looking at the situation.

Lion:

Let’s assume they are asking for repayment. I’m not convinced they are because…..

1- Repayment, while doable does weaken the company on a cash basis. The risk then is Q3 and Q4 suck and the company goes into a cash crunch with that $10M not in the bank. IF that causes a Chapter 11, Lion’s warrants are worthless, they lose the whole investment (24M priced at $.66/each), further, because they are no longer a debt holder, their positioning in that scenario is materially weakened.  In short, other than a bargaining chip to get Dov back into control, it makes little sense for them to do this

Dov:

He wants to be back at the helm but the recent deal with Standard may mean even he is seeing reality here that the chances of that are weakening by the day. That being said he is the largest shareholder and does not want to leave this with his 74M shares worth nothing….at the end of the day he will do what is best for the stock now and live to fight another day down the road.

Standard General:

Have a loan to Dov for $19M that they probably can’t collect on unless the stock retains value. They also own 1.5M shares on their own UPDATE (and warrants from Dov for the shares sold to Dov and another 4.7M sharers) I’m sure they’d rather not see evaporate. What better way to do this than loan $APP the money to pay off Lion and give them financing on better terms (maybe warrants for $10M worth of stock?)?  According t0 the SEC they hold stocks worth > $500M (this does not include cash) so the funds for them are easily accessible.

Monarch:

They’d love to take control via the debt they have been buying but there is little they can do as long as Charney, Standard, Lion and the Board of APP don’t commit hari kari. While not out of the question, I think it falls on the “not likely” side of the equation.




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