The power struggle between the ousted founder and now-bankrupt Los Angeles-based cloth retailer American Apparel Inc took a new turn after the founder Dov Charney announced the hiring of Cardinal Advisors LLC to regain its control and a fresh bid for take over. Charney founded the made-in-America clothing line in 1989. He was ousted in December 2014 after allegations of misconduct and financial failures.

Charney in a statement said, he is “exploring plans with investors and industry executives in an effort to develop a value-maximising solution" for American Apparel, reports Middle Market.

“Charney is confident that new and existing investors, working with him and his team of industry leaders, would be able to realize significant long-term value for American Apparel's stakeholders," a statement by Cardinal Advisors added.

The bankrupt company is now running the operations under a group of lenders including New York hedge fund Standard General LP. However, American apparel played down the ex founder’s move as a mere expression of interest.

“We can confirm that there is currently no transaction to consider and that Mr. Charney has submitted nothing more than an indication of interest,” an American Apparel representative said.

“American Apparel evaluates all indications of interest consistently, and in the ordinary course,” the spokesperson explained.

Bankruptcy plan

American Apparel filed a bankruptcy protection plea on Oct. 5 backed by a pre-arranged plan which proposes its takeover by the company's secured lenders, including Standard General, reports The Wall Street Journal.

Prior to bankruptcy, American Apparel underwent a series of setbacks including the ouster of Charney and a stark decline in year-over-year sales, by 17.4 percent and a series of store closures.

American Apparel announced store closures as part of the company's turnaround plan for implementing US$30 million (AU$42 million) led by cost-cutting initiatives and upgrading of the brand's apparel lineup. After the exit of Charney, the brand also worked towards toning down the explicit sexiness in its advertising.

Charney strategy

Apparently, the founder has chosen an appropriate time to strike back. American Apparel is more attractive in the bankruptcy phase for acquisition, according to analysts. A confirmation hearing for American Apparel's reorganisation plan with no role for Charney is coming up on Jan. 20, 2016. It shows Charney will have an uphill battle in winning back the company.

Charney made a big contribution in raising the visibility of the brand as a hip retailer known for its sexy, classic T-shirts and leggings. He was also admired for his commitment to manufacture in the US. But his leadership did not help in improving the company’s financial position.

Risk of reorganisation

The reorganization comes with a risk for all shareholders. It would exchange about US$200 million (AU$278 million) worth of debt for equity and erase the wealth of shareholders, including Charney, who is the largest stockholder.

The company's financial mess was massive. It lost US$65 million (AU$90 million) on US$385 million (AU$534 million) in sales for the nine months that ended on Sept. 30. American Apparel has 9,000 employees and runs more than 200 stores.

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