Cherokee cedes control in LBO; Drexel underwriting deal gives firm the upper hand.

Cherokee cedes control in LBO 

Drexel underwriting deal gives firm the upper hand

The Cherokee Group Inc., a profitable apparel maker based in Sunland, will soon be majority-owned by a partnership formed by troubled investment banker Drexel Burnham Lambert Inc., according to a recent filing made with the federal Securities and Exchange Commission.

"Drexel is going to end up owning a majority of Cherokee, that is pretty much the way it is," said Peter Tamny, member of Cherokee board and managing director with Shearson Lehman Hutton Inc. in Los Angeles. "The buyers really didn't have the capital to finance the deal. If Drexel puts up the money, they are going to own it."

Drexel will underwrite an $80.0 million bond offering (net proceeds) to finance the completion of an ongoing buyout of Cherokee, according to the filing.

Directors of $156.2 million (sales) Cherokee, after a bitter fight between James Argyropoulos, founder, chairman and chief executive, and members of his senior management, agreed late last year the company would be taken private by senior management in a $168 million buyout.

Argyropoulos was ousted, and Cherokee moved from its former headquarters in North Hollywood to Sunland, a Los Angeles community north of Burbank.

The Cherokee brand is perhaps best known to Angelenos for its advertisements on local bus stops.

The buyout, to be presented to shareholders pending approval of proxy statements by the SEC, was arranged by the Westside-based private investment banker Jeffrey Deutschman, 31, of Deutschman & Co., and financed by Drexel Burnham. Shareholders are expected to approve the deal in late January or February.

As 49.9 percent of Cherokee stock is already controlled by Deutschman, shareholder approval of the buyout is all but certain.

Senior management, composed of Robert Margolis, president, Cary Cooper, chief financial officer, and Jay Kester, president of the company's apparel division, now operates the company.

According to the bond filing, an entity named DC Partners I, L.P. will own 70.7 percent of the common stock of the privately held Cherokee when the buyout is made final.

DC Partners I is identified as a partnership composed primarily "of an affiliate and employees of Drexel Burnham," and other, unidentified, institutional investors.

It was not disclosed if Drexel Burnham's Beverly Hills-based junk bond king Michael Milken was a member of DC Partners I. Milken is currently under investigation by the U.S. Attorney's office for violation of securities laws. He has denied any wrongdoing.

Drexel spokesman Steven Anreder declined to comment on the question. "We never disclose the identities of employees in this kind of document," said Anreder. Cooper, Cherokee chief financial officer, declined to discuss the Drexel partnership, referring questions to Deutschman & Co. Jeffrey Deutschman did not return calls.

Cherokee board member Tamny described Deutschman as "young and bright" and "an agent" of Drexel Burnham. "Deutschman is really an agent of Drexel, he is pretty much captive to them," said Tamny. "He has license to go out and hunt down deals, and then bring them back to Drexel for financing."

Tamny added, "Perhaps the only unusual aspect about this deal is that Drexel is going to end up owning a majority share of Cherokee, but Drexel has structured a lot of deals this way in the past."

According to the filing, Deutschman formerly worked for Spectrum Group Inc., a Westside leveraged buy-out group, and was a vice president at W Acquisition Corp., parent company of Warnaco Inc., a Bridgeport, Conn. apparel maker.

Deutschman may need a special understanding of the apparel industry -- the SEC filing presents Cherokee as a profitable enterprise that will sink into red ink under new bank debt and the $80 million of high-yield bonds to be issued by Drexel.

In the twelve months ended May 28, 1988, Cherokee posted earnings of $12.8 million on revenues of $156.2 million, its most profitable twelve months ever.

Cherokee carried virtually no long-term debt, making it ideal as a takeover candidate.

In "pro forma" terms -- that is, assuming the company carried the $148.3 million in long-term debt it will shoulder after the buyout -- Cherokee would have lost $8.1 million in the twelve-month period ended May 28.

Cooper, however, said the new debt would not be too burdensome. "For a substantial portion of the debt, in the five years after the buyout, we can issue new debt in lieu of interest payments," said Cooper. "We will not change the way we operate."

Cherokee's filing with the SEC, known as an S-1 bond registration, is made prior to a public offering of bonds. The actual bonds have not been issued or priced, and, as of yet, no prospectus has been printed. The SEC must review and approve the documents. The effective interest rate has not yet been set, nor has the face amount of the bonds.

The filing also revealed that Everett Clayton III resigned his position at the prestigious Latham & Watkins law firm in Los Angeles to join Deutschman & Co., and will serve on the board of directors of Cherokee.

PHOTO : Good looks: The twelve months ended May 28, 1988, was Cherokee's most profitable year ever