California Apparel News

An agreement to acquire American Apparel Inc., the Los Angeles apparel maker and retail chain known for its provocative ads and quirky founder, Dov Charney, was to have been completed by the middle of this year.

But the $374.2 million transaction is now expected to be wrapped up by the end of this year, if not before.

No definitive date has been set for the transaction, which is basically a reverse merger, or a back-door initial public offering, between publicly traded Endeavor Acquisition Corp. in New York and privately held American Apparel.

But Charney has until Oct. 31 to buy out business partner Sang Ho Sam Lim’s 50 percent share of American Apparel, valued at a minimum of $60 million plus an undetermined cash price.

If Charney, who already owns 50 percent of the company, doesn’t complete that deal by the end of October, then Endeavor will purchase Lim’s half of the company and reduce the amount of stock given to Charney. Lim cannot compete with the combined companies for four years, according to terms of the deal.

The reverse merger, which is a fast-track method for a private company to become a public company, has been on hold while Endeavor took a look at American Apparel’s financial books. It wanted to determine if American Apparel was really as profitable as believed and get an opinion from investment bank Jefferies & Co., which gave a thumbs up to the deal.

On Aug. 20, Endeavor said it was confident American Apparel was a fast-growing company with tons of potential. Endeavor’s growth strategy relies in part on opening new stores, as many as 800, and remodeling existing stores each year.

The unaudited financial results for the second quarter of 2007 showed that American Apparel had revenues of $95.6 million, up 36 percent over the same time last year. In 2006, its revenues totaled $285 million, with 2007 revenues projected to be $355 million.

Also, same-store sales at its 157 outlets were up 24 percent during the second quarter from last year. But in 2006, they were up only 4.8 percent over 2005.

Once Charney turns over all American Apparel’s shares, Endeavor will give him up to 32.2 million shares in the publicly traded company, giving him a 61 percent ownership in the merged entities. Endeavor also assumes up to $110 million in American Apparel debt, which was listed at $119.4 million as of June 30.

No date has been set for a special stockholders meeting to vote on whether Endeavor should acquire American Apparel. “The final proxy is not out yet,” said Jean Fontana, an Endeavor spokesperson, noting that the company filed a revised proxy document with the Securities and Exchange Commission on Aug. 20, outlining terms of the deal to shareholders.

Charney was not available for comment.

In a change from December, when the deal was first announced, Endeavor plans to increase the number of authorized shares of common stock from 75 million to 120 million. Currently, Endeavor’s stock is selling at about $10.75 a share.

All American Apparel’s stockholders have approved the transaction, and Endeavor’s board of directors has recommended the acquisition.

If the merger goes through, Endeavor, traded on the American Stock Exchange, will take on the corporate name of American Apparel and move its headquarters to downtown Los Angeles, where the apparel company makes a wide range of products from T-shirts and dresses to bathing suits and blue jeans.

Charney, now American Apparel’s chief executive, will keep his title and add the position of president. His three-year employment agreement pays him only $1 a year, but he is eligible for profit sharing and stock options.

If the merger doesn’t go through, Endeavor, which was set up in 2005 as a “blank-check firm” to acquire a fast-growing company, must liquidate by Dec. 21. All funds set up in the company’s trust fund will be given back to Endeavor’s common stockholders.

The hunt for a company

At the beginning of 2006, Endeavor aggressively started hunting for some kind of company to acquire.

Jonathan Ledecky, Endeavor’s chief executive officer, sat down with an investment banking firm and discussed possible acquisitions. He was steered toward a branded restaurant chain based in Los Angeles. But a private-equity firm beat Endeavor to the punch, paying cash to close immediately.

Then Endeavor considered buying a chain of weight-loss centers headquartered in California, an ethanol producer in the Midwest and another restaurant chain in California. All those deals fell through. Then Martin Dolfi, an Endeavor consultant, mentioned American Apparel.

American Apparel is a popular brand with a corporate strategy different from most American apparel makers. It still produces its entire line of clothing in a factory in downtown Los Angeles. Its employees earn at least the state minimum wage of $7.50 an hour or higher and receive health benefits. The company supports immigrant rights and offers free English classes.

American Apparel is also famous for its sexy T-shirt ads, many using employees as models. But American Apparel landed in hot water in recent years when several employees charged Charney with sexual harassment. Two of the three suits have been settled.