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FiveT Capital Scoops Up Stake in American Apparel

Stocks in this article: APP

NEW YORK (The Deal) -- FiveT Capital AG, a Switzerland-based asset management firm, has built up a 12.69% stake in American Apparel (APP), according to a regulatory filing Monday after the troubled apparel retailer succeeded in its latest fund raising attempt.

Los Angeles-based American Apparel raised $30.5 million by selling 61 million shares at $0.50 per share March 27.

FiveT got its stake in the company from purchasing 22 million shares from the offering's underwriter Roth Capital Partners LLC, a source said.

The investment firm is enthusiastic about the company's prospects and, so far, isn't expected to agitate for change, an industry source said. FiveT had been talking to management since it took its stake, observers said, something the firm said in its regulatory filing it was likely to do.

American Apparel did not respond to requests for comment. FiveT did not respond to an e-mail requesting further comment on its investment.

The investment through the share offering comes not a moment too soon. The company has been threatened with delisting by the New York Stock Exchange. It also had a $13.5 million interest payment due April 15 on $206 million in 13% senior secured notes due April 15, 2020.

With the latest investment not only will the debt payment be covered - as well as others due this year - but the company will also have funds to effect a turnaround.

A second source said that the capital, in addition to the $40 million in Ebitda American Apparel is expected to generate this year, will cover a total of $35 million in debt and interest payments due this year, plus allow it to make $10 million in capital expenditures. The source added, however, that American Apparel plans to try to renegotiate those debt and interest payments.

London private equity firm Lion Capital LLP, which has backed the company since 2009 when it invested $80 million, also took 24.5 million shares in the share sale by exercising warrants that allowed it to counter the dilutive effect of the offering. Lion has two seats on the company's board and a minority stake, as well as a $9.5 million loan out to the company.

One stumbling block -- and resource -- for the company has always been its chief executive and founder, Dov Charney. Though one industry source said Charney has the creativity, he lacks management skills, therefore, either he would need to be replaced, or he would have to be surrounded by a competent management team.

American Apparel is also locked into agreements with some of its factories, which produce exclusively for the retailer, so regardless of demand, the factories have to be kept busy. The resulting excess inventory would have to be marked down, ultimately hurting margins.

But the company had also instituted a new distribution system that had its own set of problems, another source said, which is what hurt American Apparel's gross margin over the last year. With that problem fixed, the company expects Ebitda to rise.

Other strategies the company needs to consider are increasing the quality of the merchandise, such as materials, increasing prices and taking the brand more upscale, producing more of its apparel in countries with cheaper labor, and reviewing its real estate portfolio with the goal of closing underperforming stores, or finding better locations, a source said.

Because the company staked its very name on its made-in-America products, moving production overseas is unlikely, said someone familiar with its plans.

Still, with all the fast fashion competition that wasn't around when Charney founded the company in the late 1990s, American Apparel has to figure out how to compete if it wants to keep production at home, an industry observer said.

American Apparel has a market cap of about $84 million and was trading at 49 cents a share Monday afternoon.

American Apparel's bondholders are being advised by legal counsel at Milbank, Tweed, Hadley & McCloy LLP and financial advisers at Houlihan Lokey Inc.

Besides Roth Capital, which served as sole bookrunning manager for the latest offering, Brean Capital LLC was co-manager. Legal counsel was provided by Skadden, Arps, Slate, Meagher & Flom LLP.

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