Canadian investors rescue American Apparel

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A group of Canadian investors has swooped in to rescue American Apparel Inc. , the former high-flying clothing retailer run by controversial Montreal-born designer Dov Charney, as it teeters on the brink of insolvency.

In a deal Mr. Charney refers to as an opportunity to prove himself after a year of financial and legal turmoil that nearly sunk the business, American Apparel has struck a deal for up to $40-million (U.S.) of financing, including more than $14-million up front, in exchange for shares.

While that may not seem like a large sum, it provides cash-strapped American Apparel with the operating funds needed to revive its manufacturing and distribution operations. The Los Angeles-based manufacturer, which is known for its colourful T-shirts and cotton basics, was nearly crippled by rising cotton prices and a dispute with the U.S. government that forced it to lay off thousands of workers who did not have proper immigration documentation.

The group of Canadian investors is led by Delavaco Capital, a private equity firm run by Toronto oil and mining financier Andrew DeFrancesco, and Michael Serruya, the Toronto creator of the Yogen Fruz World-Wide Inc. chain who later co-founded Canadian ice cream giant Cool Brands Inc.

"I have something to prove here," Mr. Charney said, referring to the new lease on life the Canadian investors have given his firm. He was speaking to The Globe and Mail on the phone from Los Angeles Friday as the deal was being finalized. "What I have to prove here is that creativity wins."

American Apparel rose to retail stardom five years ago, riding a wave of controversial advertising that often involved depicting young women in suggestive poses, which Mr. Charney likens to some of the racy Calvin Klein and Guess ad campaigns of past decades. The retailer built its brand on edgy hipster clothes that are manufactured in Los Angeles, rather than outsourcing such work to countries where labour is cheaper, as many textile makers have done.

However, the company's battles with the U.S. government, rising cotton prices and legal problems Mr. Charney has faced involving unproven allegations of sexual harassment have loomed over the brand. The problems drove American Apparel to a pre-tax loss of $7-million last year, after the retail chain posted more than $70-million in pre-tax earnings in 2008, and $56-million in 2009. It had a net loss of $86-million last year.

With the new funding behind him, Mr. Charney figures the company can make $100-million in pre-tax earnings a year.

"I don't think this brand has ever lost the attention of metropolitan adults in Toronto or Paris or London for that matter. It's not about revival [of the brand]it's more about refining our business."

Under the terms of the deal, the Canadian investors will get shares at 90 cents a piece in exchange for about $14.2-million of immediate funding. The investors also have warrants to buy about $27-million worth of additional shares at that price.

The shares hit an all-time low of 74 cents three weeks ago as American Apparel seemed destined to run out of cash. However the stock rallied in the past few weeks amid talks of a restructuring to close at $1.24 on Thursday. The shares traded at nearly $16 in late 2007 during the zenith of the company's popularity.

Mr. De Francesco and Mr. Serruya were two key investors behind the revival of the Jamba Juice chain in the United States, helping the brand restructure its debt and return to profitability. They are using a similar strategy with American Apparel.

"American Apparel represented the type of world-class brand that we wanted to get involved with, similar to what Jamba Juice was. We saw a lot of value in that," Mr. De Francesco said. "What Dov's built on a shoestring budget is incredible."

"There's risk in everything, but to be honest, the negatives that Dov's had that went on with the company [over the past year]have created the opportunity for us to get involved. And we're excited about that."

Sources indicate the group of Canadian investors also includes Dynamic Power Hedge, Front St. Capital, Power One Capital Markets, Sentry Select Capital and Edgehill Partners. As well, sources close to the company said there may also be an effort to restructure the company's long-term debt, held by Lion Capital of the U.K.