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California and the West

Clothier has designs on the world

American Apparel charts an expansion after it goes public in an unusual stock deal.

December 20, 2006|Claire Hoffman and Leslie Earnest | Times Staff Writers

With a nearly $280-million stock deal confirmed Tuesday, Los Angeles clothier American Apparel is poised to put its edgy, titillating stamp on cities worldwide.

The company is charting a blistering and potentially risky global expansion in the wake of a deal with New York-based Endeavor Acquisition Corp. Now with 143 stores in 11 countries, American Apparel plans to open 150 stores in each of the next three years alone, including in such locations as Dublin, Ireland, and Madrid.

After the transaction with Endeavor closes, American Apparel would be a public company, enabling it to tap equity markets for funds without enduring an initial public offering.

"This deal gives American Apparel the capital it needs to continue its aggressive growth plans," said spokesman Joseph Teklits. "There's potential for significant growth globally."

But shoppers are notoriously fickle. And the company is expanding in the face of intense competition from the likes of Abercrombie & Fitch and Sweden's H&M, which are also aggressively vying for the attention of young consumers.

Nonetheless, investors embraced the deal enthusiastically. On Tuesday, Endeavor's stock rallied to its highest point since it began trading, surging $1.15, or 15.2%, to $8.70, raising the market value of the transaction.

American Apparel is expected to remain firmly in the grasp of its controversial chief executive, Dov Charney, 37. In an interview, Charney said he would maintain control of the company with ownership of half the shares.

He and Endeavor's current shareholders would each appoint four directors, with one mutually agreed upon tiebreaker.

In the nine years since he started the company as a wholesale T-shirt maker, Charney has made American Apparel one of the best-known names in casual clothing. But with the increased scrutiny that a public company tends to face, Charney is expected to bring in several new executives, such as a chief operating officer and a chief information officer.

Charney, however, said he planned to remain a business maverick.

The executive has adroitly used controversy to make a name for American Apparel even though it initially operated on the margins of the garment industry. He has plastered billboards with sexy ads that some critics found offensive, and has been an outspoken critic of sweatshop conditions. The company's factory workers are paid above-average wages, treated to massages and offered English lessons.

"We plan to continue to behave in a contrarian manner," Charney said. "This creative environment is what got us to this point. We certainly aren't going to stop doing it now after we created a highly profitable company."

Charney, who has had to deal with sexual harassment allegations linked to the company's sexually charged workplace, acknowledged that he lacked so much as a business suit, which could be problematic because "I have to have an investor relations meeting tomorrow."

Charney's 5,500 employees, most of them immigrants in Los Angeles, would benefit from the transaction. Charney has allotted 2.7 million shares to his staff, which means each employee on average would get stock currently valued at more than $4,000.

Charney said Endeavor approached him out of the blue this year with a proposed deal. Lead investors John Ledecky and Eric Watson flew to Montreal, Charney's hometown, to discuss Charney's global vision over a steak dinner with the executive and his father.

Negotiations began in earnest in New York in November and concluded Monday.

Endeavor went public as a "blank check" company that raises capital with the understanding that management will find the right assets to buy within a specific period of time, or return the money. Any acquisition typically must be approved by 80% of the shell company's shareholders.

American Apparel is Endeavor's first acquisition.

"It's just another tool to effect an acquisition where individual investors do have certain controls over the decision making," said Brien Rowe, managing director for Los Angeles investment banking firm Sage Group.

Endeavor's Ledecky made his fortune in the 1990s as the chairman of U.S. Office Products, which grew into a Fortune 500 company and gained a reputation for gobbling up smaller companies.

The investor, who would own 1.75 million shares, about 3%, of American Apparel, said he would be "a mentor and advisor" to Charney.

"I've had the same experience Dov is about to go through in terms of rapid growth, in terms of running a public company," he said.

Ledecky said that several Endeavor employees had piqued his interest in American Apparel when they mentioned the company during discussions about how Endeavor should invest the $129 million it had raised. One of the employees wore American Apparel T-shirts to work regularly.

Ledecky visited American Apparel's Los Angeles factory with Endeavor Chairman Eric Watson. Ledecky said he was impressed that the clothing company, which started with $100,000, had annual sales of $275 million and earnings of $30 million.

"In my 25-year career, I've never seen the velocity of growth that he had accomplished there," Ledecky said.

claire.hoffman@latimes.com

leslie.earnest@latimes.com

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