Dov crunches the numbers

As American Apparel CEO Dov Charney was making headlines for his masturbating, girl-chasing ways, his company's finances weren't exactly in great shape. The WSJ's Nicholas Casey reports that by early 2006 the place was running into serious funding problems because of all the new store openings. Later, an audit revealed that American Apparel had inflated its 2005 earnings by nearly 30 percent. Charney says the auditors "were exaggerating" and he still believes the revised earnings, not the originals, are wrong. In any event, he was running out of money. Having failed to court lenders and knowing that a regular initial public offering was out of the question (see first line of post), Charney stumbled upon what's known as a "blank check" IPO. That's when a public company is formed with the express purpose of acquiring a private company (it's called a "special purpose acquisition company"). A deal has to get done within 18-24 months of the IPO.

To do the deal, American Apparel needed willing partners -- and found them in Jonathan Ledecky and Eric Watson, two financiers who had helped bring SPACs into broader use. In this case, they had founded a shell company called Endeavor Acquisitions Corp. and raised public money for a takeover. Although Mr. Charney felt the men were pricing American Apparel far below its actual value, "I needed the money now, and they knew," Mr. Charney says. Under expected conditions, Endeavor would acquire American Apparel and Mr. Charney would receive a 55.1% controlling stake in the company; the company would receive an equity infusion of more than $125 million.

But there was a catch: The pair wanted Mr. Charney to give up the CEO post. "As if that was going to happen," Mr. Charney recalls thinking. He refused to cede the top post, and Mr. Ledecky acquiesced, announcing a deal with the company in December 2006. Still, Mr. Ledecky says he had won agreement that American Apparel would bring in a new CFO, chief information officer and chief operating officer. But that, too, would change. Under the terms of Endeavor's agreement with investors, the holding company would dissolve if the merger weren't completed by December 2007. About a month before that deadline, Mr. Charney asked that "the new suits" not be brought in at all, Mr. Charney recalls. "We strongly disagreed with that," recalls Mr. Ledecky. "But at the same time you could have had a situation where the clock on Endeavor would have run out." Mr. Charney got his way. On Dec. 12, the company began trading on the American Stock Exchange. Mr. Charney was now worth more than $580 million.

This being a Dov Charney story - much of it a rehash of many other Dov Charney stories - there were a couple of surreal moments.

He sees himself as crusading against today's puritanical conventionality and likens himself to Larry Flynt, the Hustler magazine publisher who fought many First Amendment battles. Mr. Charney stages provocative photo shoots in the basement of his Los Angeles mansion -- a hilltop perch filled with stacks of his vintage porn magazines. On a recent evening there, a young female employee served Mr. Charney tomatoes over rice while another, dressed in underwear and a T-shirt, was quizzed by her boss on competing brands. "If you're offended by sexual innuendo or masturbation or sexual coloring books -- if you're offended by any of these, then don't work here," Mr. Charney says.