Following in the footsteps of Jamba Juice (NASDAQ:JMBA), American Apparel has decided to come public not via the traditional route of an initial public offering, but by being acquired by a shell company.
American Apparel offers a number of basic items such as T-shirts, underwear, and sweats that can be found in its 143 retail stores in 11 countries, including the U.S. As a consumer with a few of the company's products in his home, I can attest to routinely being able to find the company's products at a discount on Amazon.com (NASDAQ:AMZN) and other websites. Whether the products not found in the company's stores are last year's designs is not known to me, but as the company's products are fairly basic in nature, I'd have a tough time telling the difference.
American Apparel and Endeavor Acquisition (AMEX:EDA) announced today that Endeavor will acquire American Apparel for 32.26 million of restricted stock in Endeavor plus the assumption of $110 million of net debt outstanding at American Apparel. Endeavor is also creating a merger bonus pool of $2.5 million and setting aside 2.7 million shares for issuance to American Apparel employees.
Those are the basics of the deal, but there is one unusual provision in the offer from Endeavor that requires American Apparel CEO, Dov Charney, to purchase the interests of another American Apparel owner for $60 million. Failure by Mr. Charney to do so means he will lose 7.7 million of the 32.26 million shares coming to him and that Endeavor will instead purchase the other owner's interest for $60 million. This second scenario means that American Apparel will have $60 million less available to it for expansion and balance sheet stability. A final provision to the deal requires that Mr. Charney hold his shares for no less than three years.
For such a well-known company and brand, this is an unusual route for the company to take. But it's not the first unconventional move for American Apparel. Like Abercrombie & Fitch (NYSE:ANF), which has often received flack for its provocative ads, American Apparel is well aware that sex sells and has some of the more suggestive marketing out there. CEO Charney brings a great deal of controversy to the table for potential investors in the combined company as the sexual nature of the marketing appears to have spilled over inside the company as well. At least one of the suits brought against the company has been dismissed, but that there is sexual tension within the company, and not just in its marketing, doesn't appear to be in dispute.
Whether or not the company succeeds in the long term is another issue altogether and may or may not have anything to do with the noise surrounding the company. Ultimately, the company sells very basic products at a premium price by offering better quality (or at least the perception of better quality) and clever marketing. This is necessary, because the company's use of more expensive American labor means it will not be the lowest cost producer. Although this is a clever business model, the apparel business is brutally competitive and the model can be replicated.
As with most IPOs, conventional or not, this IPO is primarily a financing event and one that should help American Apparel with its large debt position. For that reason and the fact that apparel retailing is brutally competitive, investors are better off taking some time to wait and read the full financials and required disclosures that the combined company will file over the next year before making any investing decisions. There are easier ways to make some money in the meantime.
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At the time of publication, Nathan Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
