January 10, 2017 / 12:27 PM / 7 months ago

American Apparel's 'made in U.S.' heritage uncertain after deal

5 Min Read

The American Apparel factory headquarters is pictured in Los Angeles, California July 7, 2014.Jonathan Alcorn

MONTREAL/NEW YORK (Reuters) - American Apparel LLC's made-in-the-U.S. heritage is uncertain after Canadian apparel maker Gildan Activewear Inc (GIL.TO) won a bankruptcy auction to acquire the edgy fashion retailer for about $88 million in cash.

Gildan said on Tuesday it will buy manufacturing equipment and intellectual property rights related to American Apparel, but the Canadian company did not assume the leases of the retailer's California manufacturing plants, fueling questions over where the clothing will be produced.

Reuters reported late on Monday that Gildan had won the auction, which also attracted bidders such as California-based apparel maker Next Level Apparel and had garnered interest from Amazon.com Inc (AMZN.O) and Forever 21 Inc.

Gildan's stalking-horse bid of $66 million for American Apparel, an offer that set the floor for competing bidders, included an option to acquire the company's manufacturing operations. Gildan had planned to maintain some operations as recently as last week, but then reversed course.

Garry Bell, a Gildan spokesman, said the company would decide where to make the clothing when it completes its integration plan.

"We felt it was best to not assume these leases while we worked through that plan,” he said, adding details will be outlined Feb. 23.

American Apparel had insisted in the weeks leading up to its bankruptcy and auction that any deal would keep its manufacturing plants in the United States. On Tuesday, a spokeswoman said that "the manufacturing facilities were always a part of negotiations, and any decision by the buyer to not assume these operations is at their discretion."

Gildan, which manufactures yarn in North Carolina and Georgia, has no "apprehension about investing in the United States," Bell said.

However, close to 90 percent of Gildan's 42,000 employees are in low-cost Caribbean and Central American countries, and the company does not manufacture clothes other than socks in the United States.

Hot-Button Issue

Keeping jobs in the United States has become a hot-button political issue since the election of Donald Trump, who campaigned on stopping manufacturing jobs from moving overseas. Trump's transition team did not immediately return a request for comment.

Bell said American Apparel's U.S. manufacturing heritage is a component of the brand, but Gildan's plan for it will also consider factors like transportation and energy costs.

While Bell said Gildan is considering hiring some workers in product design and merchandising, approximately 3,500 American Apparel employees have received notices that they could be laid off as soon as this month, according to California public notices.

American Apparel's Los Angeles plants are some of the largest private garment-making operations in the United States, and the mostly immigrant employees from China, Central America and Mexico are paid minimum wage and receive extras like bonuses and subsidized public transportation, said worker Irma Fuentes.

"We don't know now what's going to happen," Fuentes said by phone on Tuesday.

Gildan, whose branded apparel and printwear basics compete with Hanes Brands Inc (HBI.N), has also said it will not buy any of the 110 American Apparel retail stores. However, existing American Apparel stores will continue selling the clothes for the next 100 days as Gildan decides how to make the products available to consumers, Bell said.

Analysts said Gildan's focus on just the brand, coupled with its vast distribution network and an ability to control costs, would benefit American Apparel, which spent heavily on its stores and racy marketing campaigns.

“Gildan is very good at sticking to what they are good at,” said an analyst who asked not to be identified. “They know they have no business running retail stores or being a marketing machine.”

American Apparel filed its second Chapter 11 in November with about $177 million in debt after the failure of a turnaround plan. It filed for its first Chapter 11 in October 2015, and emerged from bankruptcy early last year.

The deal, which is subject to approval from a bankruptcy court on Thursday, pushed Gildan shares up in Toronto and New York on Tuesday.

Additional reporting by Siddharth Cavale and Komal Khettry in Bengaluru; Editing by Shounak Dasgupta and Matthew Lewis

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