American Apparel Inc. needs to come out of bankruptcy quickly with a much stronger international presence and a familiar face at the helm – ousted founder Dov Charney.
That’s the vision of the man who wants to buy the beleaguered downtown L.A. retailer.
His name is Chad Hagan. He’s the lead investor in a $300 million bid to buy the distressed company, and he sees Charney as key to his investment group’s recovery strategy.
“Dov created that company, moved it from a room to a small business to a midmarket business and finally a public company. He just needed better lieutenants behind him,” said Hagan. “We plan to bring him back in a co-CEO position so he can continue to do what he did best, which was to be a merchant.”
He added that Charney supports his investment group’s plan, which in addition to giving Charney a partner to help him lead the company includes retaining American Apparel’s brand message of local manufacturing as well as opening more stores in Asia and emerging countries.
“We’re going to do our best to put the empire back together in a smarter and leaner fashion,” Hagan said. “We want to keep the jobs, the name and the business. The brand has a lot of value – it’s the most relevant of American brands built in the last 30 years.”
As managing partner of investment firm Hagan Capital Group/HCG Inc. in Roswell, Ga., Hagan is being joined by Silver Creek Advisors and the firms’ joint venture, PressPlay Group, in the $300 million bid to buy the distressed company out of Chapter 11 bankruptcy. Silver Creek is, like Hagan Capital, a family office. Their bid is the only one that’s been publicly announced.
Hagan’s group, however, faces an uphill battle for the company, which ousted Charney as chief executive in December 2014. American Apparel and its board have rejected the offer, he said. Meanwhile, a Delaware bankruptcy court this week is scheduled to consider approving a reorganization plan that the clothing company, bondholders and its unsecured creditors have approved.
Charney is crusading for Hagan’s bid by filing legal motions with the court, asking it to delay the Jan. 20 hearing and intervene in the case and force American Apparel and its creditors committee to reconsider Hagan’s offer.
Hagan’s group has Charney’s backing, as the ousted chief executive would get an ownership stake in the company. Charney’s shares were wiped out when American Apparel filed for bankruptcy.
Amid failing sales, looming debt and strangling interest payments, American Apparel declared Chapter 11 bankruptcy in October. That opened the door for Hagan and the investor group.
“One of our strategies is distressed debt – companies in bankruptcy,” Hagan said. “I’ve been following Dov and American Apparel for a number of years. The opportunity came up.”
Hagan Capital is part of a family office that made its money primarily from nursing homes in Georgia and Florida.
Should Hagan’s bid be successful, it would be the first foray by Hagan Capital and the group’s into owning an apparel company. Much of its experience is in health care – long-term care and skilled nursing facilities – and commercial real estate.
Hagan still hopes to reach an agreement with the retailer and its bondholders. A legal battle would result in a much less attractive deal for bondholders, he said. But if not, he highlighted his 20-plus years of experience with lawsuits and reclaiming assets for his firm’s commercial real estate investments.
“We are not looking to devote valuable resources – in other words, money – to a big drawn-out legal fight, because what’s going to happen is the company is going to get kicked down the road even further,” he said.
Also fighting for control of the clothing maker is American Apparel and its bondholders, which include Standard General hedge fund and Monarch Alternative Capital, both in New York. Their agreed-upon reorganization plan would provide the company with $80 million in liquidity, compared with the Hagan group’s offer of $160 million.
In a prepared statement about the reorganization plan, American Apparel Chief Executive Paula Schneider said, “This is an important step forward in emerging from our restructuring process as a stronger, more vibrant company.”
In response to Hagan’s bid, an American Apparel spokesperson referred to a statement the company used recently. It reads: “American Apparel evaluates all bids consistently, and in the ordinary course. The company remains focused on pursuing the completion of its financial restructuring following its planned bankruptcy court hearing at the end of this month.”
Hagan is a firm believer in American manufacturing and in keeping American Apparel’s manufacturing in Los Angeles. He said the retailer’s products appear to be competitive on a per-unit cost basis with competitors, particularly in terms of quality.
“I see no value in the long term in the current retail model where people are distributing and selling other’s goods; that gets more and more cutthroat every day,” Hagan said. “However, if you’re the manufacturer, the entrepreneur and the merchant, that’s a great situation to be in.”
Should his vision materialize, Charney as co-chief executive would focus on design, the stores, manufacturing and purchasing.
Hagan and his investors would act as American Apparel’s financers, Hagan said, helping Charney plot a new path and hire supporting leaders, while also having seats on the board.
The firm, as it invests in internal and family-based capital, isn’t beholden to outside investors calling for quick returns, Hagan said. The group has no exit plan at the moment if it successfully gains control of American Apparel, but typically, investment terms are five to 10 years.
One change he would make is increasing its international retail presence, particularly in Hong Kong, Shanghai and South Africa.
“Korean stores of American Apparel are through-the-roof profitable,” he said.
Charney, who wouldn’t comment on Hagan’s bid, said, “You have to offer the right product mix at the right time at the right place. That changes from store to store and online, and if you master that, the company will flourish.”
American Apparel would become private under the proposed reorganization plan’s $200 million debt-for-equity swap. Hagan said the company has two years to get its shares listed again on a stock exchange, but the company needs to get itself in order first. American Apparel’s stock was delisted in October.
“I really do believe that there are effective ways to do high finance and investment banking and private equity, and to do it successfully without wiping out the middle class and workers,” Hagan said.
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