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As American Apparel Seeks Cash Injection, the Price of CEO's Exit Falls

American Apparel (APP) is trying to raise $8 million in fresh capital and may even be exploring a sale (although the company denies that). But who would be willing to inject cash into the business and continue to tolerate Dov Charney as CEO?

The question arises not just because of Charney's personal legal problems and his questionable abilities as an operations chief. It also affects the cost of the deal. According to Bloomberg, investment bank Rothschild is hoping to raise the money through a private equity placement similar to the one executed by Charney last month, where he bought $2 million in new shares. APP remains under $1 in part because the extra shares on the market dilute the value of the existing shares. Another $8 million in shares would be similarly dilutive -- so how would a buyer hope to extract a profit from such a deal?

One tantalizing answer would be to condition the sale on having Charney step aside as CEO -- a move that would signal the company is serious about getting its act together under its new management team (Marty Staff as chief business development officer, new CFO John Luttrell, and president Tom Casey). Such a move would almost certainly trigger a jump in APP stock.

Interestingly, Charney's exit would be relatively inexpensive. Like many CEOs, Charney is entitled to payments upon being terminated. But last year the company's compensation committee decline to award Charney any bonuses, stock or options. He earned just $764,000 last year. If Charney had been terminated last year, according to page 50 of this SEC filing, he would have received only another $750,000.

The company has forecast another unprofitable year as it struggles through its turnaround. That means APP is unlikely to rise very far this year (especially as its margins are also threatened by the rising price of cotton). And it could also mean that the compensation committee may again dispense with bonuses for its named officers.

In sum, if American Apparel's new or existing investors and creditors want Charney to step aside, the price of that is currently a bargain.


Image: American Apparel's new line of jeans.
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