American Apparel To Go Public Through Endeavor Acquisition Corp

| About: Citigroup Funding (EDA)

It caught my eye today when I saw that the t-shirt company American Apparel will now be a publicly traded entity. It's a pretty cool business; they make more or less the apparel basics: t-shirts, underwear, sweats, tank tops, etc., but make a lot of it right here in the good ol' US of A and in sweatshop free environments outside the US. They've also started to broaden the business into more, let's say, fashiony areas. The place is run by this guy named Dov Charney who's a bit eccentric [to put it nicely]. He has done a great job building the business but recently narrowly missed being taken down on sexual harassment charges from former employees [for a colorful piece on Dov, check here - keep in mind I warned you it's colorful].

Now I'm all about putting the keibosh on sweatshops, but one of the main reasons I know of American Apparel is because of their clothing. The shirts are so comfortable that I try to avoid buying any other type of t-shirt unless under extreme duress. But enough about me... I digress.

So anyway, rather than go through the whole horse and pony show that is an IPO, Dov and Co. opted to sell the company to a special purpose acquisition company - also known as a blank check company. The company they sold to is Endeavor Acquisition Corp (EDA), a blank check company that did a public offering back in December of last year and raised about $120m at $8/share. Not without some skeletons of their own, the chairman of Endeavor was found in violation of SEC insider trading rules in 2001 [he was acting as chief negotiator in an acquisition and at the same time buying shares of the target without disclosing it]. In addition, the president held directorships at a couple of companies that ended up going bankrupt and served as the CEO of a third company that also went bankrupt - though, as the prospectus points out, he wasn't at any of the companies two years prior to the bankruptcy filings.

But the past is the past right? Plus the presence of Ed Mathias, a managing director at Carlyle, and a few other guys with good pedigrees on the board, gives some comfort.

During the first year post-IPO, Endeavor did not make an acquisition, so the business was primarily just dividend income from the cash they had sitting around, and burning off some cash searching for a good acquisition target. Enter American Apparel. Endeavor plans to issue 32.2m shares of Endeavor stock to pay for the acquisition, and it will also assume $110m of American Apparel debt. Based on Tuesday's closing price, the total enterprise value of the transaction is $391m. Other notables on the transaction are the fact that Dov still has to buy out his partner at American Apparel, and that Dov has agreed to a long 36 month lock-up on all of his shares.

Endeavor's press release on the transaction says that revenue and EBITDA for American Apparel are expected to be $275m and $30m, respectively, for 2006. That would put a 13x EBITDA multiple on the acquisition. Though it's not a crazy multiple, it's certainly rich. Endeavor also noted that American Apparel has grown eight-fold since 2002, which would give them a 63% CAGR over that timeframe. Being a rather conservative investor, I'd have to see that same kind of growth in 2007 to justify the purchase price.

When you stack on the extra 20m shares that were already outstanding for Endeavor and account for the $124m of cash they have, you've got a total enterprise value of $440m. Given that they are renaming and relisting as American Apparel, this basically becomes American Apparel's enterprise value and it gives you an overall EBITDA multiple of almost 15x on 2006 EBITDA. This crosses into a price territory that I'm not really comfortable with - especially since I'd want to see EBITDA growth of 75% or higher to justify that price.

Of course these multiples are all more or less back-of-the-envelope since we don't have full financials yet, but it's enough for me to not want to jump in and start buying Endeavor stock right now. I'll likely check back in when they refile as American Apparel [they expect to close the transaction in summer '07] to get a look at the books, but until then all I'm buying are the t-shirts.

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