American Apparel Needs a Merger

American Apparel Inc. (NYSEMKT: APP) may need to find a merger candidate or a retailer to buy it out. Battles between current creditors could put it in the untenable position of having several lenders insist that it pay their loans all at the same time. The tug-of-war over control of American Apparel has already gotten violent.

According to The New York Times:

Lion Capital, a British private equity firm that once owned Jimmy Choo, has indicated it is ready to take legal measures to ensure that American Apparel makes the payment, pending last-minute negotiations with one of the clothing company’s most important shareholders, the hedge fund Standard General, according to one person with knowledge of the situation.

It is the latest turn in a tumultuous two weeks for American Apparel during which its founder, Dov Charney, was fired as chief executive. That activated a clause in the contract with Lion Capital that says if Mr. Charney is no longer at the helm of the business, the loan can be declared in default.

A loan from another party, Capital One, could also go into default.

ALSO READ: Four Retail Stocks to Sell and Avoid

If these lenders believe that American Apparel is not a prospect for success as a standalone company, they may allow the calls on their loans to push the value of common shares to zero, essentially taking over the company. At that point, they would face having to add new management, and perhaps a new board, to run American Apparel as an independent operation. This would probably involve in infusion of more money, or at least a restructuring of debt to extend payment terms. Or they could seek a healthier partner.

At the very core of American Apparel’s problem is that sales continue to slip and the company continues to lose money. In the first quarter of the calendar year, according to the SEC, American Apparel lost $5.4 million on revenue of $137 million, which was down slightly from the same period of the year before. The company said it had cost cuts, but it made the point that “these are not necessarily indicative of results to be expected for the interim or the full year.”

There are several places American Apparel could turn for such a marriage. Among them is Abercrombie & Fitch Co. (NYSE: ANF), which has a similar line-up of products. So does Urban Outfitters Inc. (NASDAQ: URBN). In either case, if the sale is driven by creditors, there is a very good chance common stockholders will get nothing.

ALSO READ: America’s Worst Companies to Work For

Sponsored: Tips for Investing

A financial advisor can help you understand the advantages and disadvantages of investment properties. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Investing in real estate can diversify your portfolio. But expanding your horizons may add additional costs. If you’re an investor looking to minimize expenses, consider checking out online brokerages. They often offer low investment fees, helping you maximize your profit.