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The Chinese network said it is negotiating with stakeholders to restructure its balance sheet.
Fred Dufour / AFP via Getty Images
Luckin Coffee
is filing for bankruptcy protection. It is another step in the complicated saga of the Chinese retail chain in trouble.
Usually, bankruptcy renders a company’s stock worthless – eventually. Luckin’s shares (ticker: LKNCY), however, were trading for more than $ 12 before the announcement and were still north of $ 7 on Friday after the news.
This gives the coffee chain a market capitalization of around $ 1.6 billion. What is happening? There is $ 1.6 billion left in value in Luckin for existing shareholders, and should people consider investing in the troubled company?
Luckin had a difficult life. Last February, the company denied reports that it had inflated its sales, but in April it formed a committee to investigate the allegations. In May, management changed, and in July, the company said 2019 sales were inflated by more than $ 300 million.
The answer to both questions – whether there is $ 1.6 billion in value in the company and whether investors should look at the stock again – is almost certainly not. There are still stores. But the company’s management is new. Luckin ‘hasn’t had financial statements in a long time and no analyst has followed the stock.
There is hardly any way for a typical American investor to know what’s going on. This is not a recipe for successful investment. Quo Vadis Capital, a registered independent investment advisor, said in a report on Friday that the shares are likely to go to zero.
Luckin did not comment on the share price, but Barron’s to a statement indicating that Chapter 15 filing is routine “in the context of the Cayman Islands restructuring … and should not be confused with a terminal bankruptcy process involving the liquidation, sale or liquidation of the company.” Luckin is incorporated in the Cayman Islands.
Luckin faces legal action in the United States as investors seek to recover the losses incurred as a result of their incorrect financial statements. This is probably a factor behind your decision to file for bankruptcy protection, Chapter 15.
Investors may be familiar with Chapter 11, the typical bankruptcy filing in the United States. Chapter 15 is similar, but for foreign companies. Luckin operates in China, although its shares are traded in the USA
“The Company is negotiating with its stakeholders to restructure the Company’s financial obligations, to strengthen the Company’s balance sheet and allow it to exit the Cayman Process as an ongoing concern, for the benefit of all interested parties,” says company news on Friday. launch. The Cayman Islands process is a restructuring effort that the company released in July.
“Stakeholders” and “shareholders”, which is important, are not synonymous. Shareholders are a group of stakeholders in a company, along with creditors, suppliers, employees and others. While companies can emerge from bankruptcy as a “functioning company”, selling coffee and croissants in the case of Luckin, reorganization plans often involve canceling existing shares. Creditors, not shareholders, are paid with the company’s existing assets.
Even if a company manages to list the shares again, the number of shares outstanding will be very different and creditors will keep most of the company reorganized.
Luckin’s shares are no longer publicly traded. The shares are traded on the over-the-counter or OTC market. Two parties – through brokers – can still exchange shares, but it is not the same as trading on a stock exchange. On the one hand, neither party – the buyer and the seller – can easily search for reliable quotes in a counter environment. And an OTC trade is between two parties. In a stock exchange, market makers are aggregating orders for many market participants.
Luckin’s stock trading is now the domain of professional investors with bankruptcy experience or traders who want to make a quick dollar by buying or selling volatile stocks. For the rest of the investor community, it’s just a story to watch and not an action to invest.
Write to Al Root at [email protected]