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The Chinese chain said it is negotiating with stakeholders to restructure its balance sheet.
Fred Dufour / AFP via Getty Images
Luckin Coffee
requests bankruptcy protection. It is another step in the complicated saga of the Chinese retail chain.
Usually, a bankruptcy makes a company’s shares useless in the end. However, shares of Luckin (ticker: LKNCY) were trading at 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 about $ 1.6 billion. What is happening? Is there $ 1.6 billion left in value in Luckin for existing shareholders and should people consider investing in the troubled business?
Luckin has had a tough career. Last February, the company denied reports that it had inflated its sales, but in April had set up a committee to investigate the claims. In May, management changed, and in July, the company said 2019 sales had inflated by more than $ 300 million.
The answer to both questions: if there is $ 1.6 billion worth in the company and if investors should look at the shares again, it is almost certainly not. There are still shops. But the management of the company is new. Luckin ‘has not submitted financial statements in a long time and there are no more analysts following the actions.
There’s almost no way any typical U.S. investor knows what’s going on. It is not a recipe for successful investment. Quo Vadis Capital, an independent registered investment advisor, said in a report on Friday that the shares are likely to go to zero.
Luckin did not comment on his share price, but he did refer De Barron to a statement indicating the filing of Chapter 15 is routine “in the context of Cayman’s restructuring … and should not be confused with a process of terminal bankruptcy involving the liquidation, sale or liquidation of the business” . Luckin is incorporated into the Cayman Islands.
Luckin is facing legal action in the United States as investors try to recoup the losses suffered as a result of their financial inaccuracies. This is probably a factor that has motivated your decision to introduce bank protection in Chapter 15.
Investors may be familiar with Chapter 11, the typical application for a U.S. bankruptcy. Chapter 15 is similar, but for foreign companies. Luckin operates in China, although its shares are listed in the US
“The company is negotiating with its stakeholders on restructuring the company’s financial obligations, to strengthen the company’s balance sheet and allow it to exit Cayman Proceeding as an ongoing company, for the benefit of all business groups. ‘interest,’ says Friday’s news of the company’s release. The Cayman procedure is a restructuring effort the company unveiled in July.
Importantly, “stakeholders” and “shareholders” are not synonymous. Shareholders are a group of stakeholders in a company, along with debt holders, suppliers, employees and others. While companies can come out of bankruptcy as an “ongoing company,” selling coffee and croissants in Luckin’s case, reorganization plans usually lead to the cancellation of existing shares. Creditors, not shareholders, are paid with the existing assets of a company.
Even if a company manages to re-list the shares, the amount of outstanding shares will be very different and the creditors will end up with most of the company reorganized.
Luckin’s shares are no longer listed on a stock exchange. Stock trading is conducted on the “over-the-counter” or “OTC” market. Two parties (through intermediaries) can still exchange shares, but it is not the same as trading on a stock exchange. On the one hand, neither party (buyer and seller) can easily seek credible quotes in an OTC environment. And an OTC trade is done between two parties. In a stock market, market makers add orders for many market participants.
Luckin stock trading is already in the field of professional investors with experience in bankruptcy or traders who want to quickly earn a buy or sell volatile stock. For the rest of the investment community, it’s just a story to watch and not an action to invest.
Write to Al Root at [email protected]