Joe’s Jeans, the Los Angeles premium-blue-jeans maker that bought Hudson Clothing nearly two years ago, is undergoing a major overhaul.
After threatened to be foreclosed upon by one of its major lenders, the board of directors of Joe’s Jeans wrapped up its lengthy negotiations on Sept. 4 with Tengram Capital Partners in a deal that needs to be approved by Joe’s Jeans’ shareholders.
In the deal, the Joe’s brand will be sold to Sequential Brands Group and Global Brands Group Holding for $80 million. Proceeds from the transaction will be used to retire the debt built up by Joe’s Jeans, including paying off the company’s senior-term loan lender.
Sequential Brands—whose other labels include William Rast, Ellen Tracy, Caribbean Joe and Jessica Simpson—has signed a long-term licensing agreement for all the brand’s core categories with Global Brands.
Hudson Clothing, the Los Angeles blue-jeans company currently headed by founder Peter Kim, will be merged in a new company with the Robert Graham brand, which also has a significant investment from Tengram Capital.
Once the Joe’s brand has been sold to Sequential, Joe’s Jeans will be renamed Differential Brands Group and remain listed on the NASDAQ. Differential Brands will encompass the Hudson and Robert Graham labels.
Following the merger of Hudson and Robert Graham, Robert Graham stockholders will own approximately 47.3 percent of Differential Brands Group’s stock; the preferred stock owned by Tengram will be converted into approximately 23.9 percent of the new entity’s common stock; the convertible noteholders, such as Peter Kim and an affiliate of Fireman Capital Partners, will own 14 percent of the stock; and the existing stockholders (including the outstanding equity awards under the company’s incentive plan) will own approximately 14.2 percent of the common stock on a fully diluted basis.
In addition, an affiliate of Tengram Capital will purchase $50 million of new series A convertible preferred stock of Differential Brands Group to facilitate acquisitions of complementary premium brands.
The merger is subject to regulatory approval and a vote by Joe’s Jeans’ shareholders. Joe Dahan, the blue-jeans company’s creative director, who is the single largest shareholder and owns approximately 17 percent of Joe’s stock, has entered into a voting agreement to vote his shares in favor of the merger.
“I am thrilled about the partnership with Sequential and look forward to keeping the heritage of the Joe’s Jeans brand as we enter our next phase of growth,” said Dahan, who will be the label’s creative director under Sequential’s ownership.
For the past several weeks, Michael Buckley, Robert Graham’s chief executive since 2011, has been at Hudson’s offices asking for reports on next year’s budget, inventory and other items, sources said. Previously, Buckley was president of True Religion Apparel in Los Angeles.
When the merger has been completed, Buckley will become the chief executive officer of Differential Brands Group. The new chairman will be William Sweedler, cofounder and managing partner of Tengram Capital Partners.
“I believe Differential is uniquely positioned to become one of the leading premium omni-channel brand platforms in the world,” Buckley said in a statement.
Joe’s has been in financial trouble ever since it acquired Hudson Clothing for $97.6 million in 2013. It defaulted on nearly $90 million in debt used to purchase its one-time blue-jeans rival.
In January, Joe’s Chief Executive Officer Marc Crossman left after nine years at the company. He was replaced by interim CEO Sam J. Furrow Jr. on Jan. 19, who, less than a month later, exited the company. The current interim CEO is Sam J. Furrow Sr., who is chairman of Joe’s board.
In late June, Joe’s Jeans got a lifeline when two major creditors—Garrison Loan Agency and CIT Group—gave the Los Angeles blue-jeans manufacturer more time to pay off some hefty loans—for a price.
In a filing with the Securities and Exchange Commission, the financially strapped company said on June 26 that it received “forbearance agreements” from Garrison, owed nearly $60 million, and from CIT Group, owed $24 million.
On Nov. 6, Joe’s Jeans received a notice that it was in default of the Garrison and CIT loans for violating certain covenants of the loans. Those covenants were that the company’s minimum EBITDA, or earnings before interest, taxes, depreciation and amortization, for the 12-month period ending Nov. 30 had to be at least $23.4 million.
With the loan default, the company’s auditors, Moss Adams LLP, raised substantial doubts about the company’s ability to continue as a going concern and that it may be threatened with liquidation. Joe’s executives said that if some kind of refinancing was not worked out, it may be forced into Chapter 11 bankruptcy.
As of May 31, Joe’s Jeans reported in its quarterly report that it only had $828,000 in cash on hand.
The loan extensions gave the apparel company some breathing room until Oct. 15, with a possible extension to Nov. 15, if a deal was reached with a potential buyer pending only shareholders’ approval. But Garrison recently told the company’s board of directors it would foreclose on Joe’s Jeans if an acquisition deal was not executed soon.
Joe’s stock, which trades on the NASDAQ, has nosedived in recent months. It is selling for around 17 cents a share. Its 52-week high was $1.08, on Oct. 9, 2014.
Its second-quarter earnings report showed that the company had net sales of $47.2 million with a net loss of $3.35 million. During the first six months of this year, it had net sales of $90.2 million with a net loss of nearly $25 million.
Joe’s Jeans are sold in high-end department stores, and the company has 13 full-price retail stores and 20 outlet stores.