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The Chinese chain said it is negotiating with stakeholders to restructure its balance sheet.
Fred Dufour / AFP through Getty Images
Luckin Coffee
seeks protection against bankruptcy. It is another step in the complicated saga of the Chinese retail chain.
Usually, a bankruptcy makes a company’s shares worthless – in the end. However, Luckin shares (ticker: LKNCY) traded more than $ 12 before the announcement and were still north of $ 7 on Friday, according to the news.
This gives the coffee chain a market capitalization of about $ 1.6 billion. What happens? Is there still $ 1.6 billion left in Luckin for existing shareholders, and should people consider investing in the troubled company?
Luckin had a hard run. In February last year, the company denied reports that it had inflated its sales, but until April formed a committee to investigate the claims. 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 a $ 1.6 billion value in the company and whether investors should look at stocks again – is almost certainly not. There are still shops. But the company’s management is new. Luckin ‘has not filed a financial statement for a long time and there are no more analysts following the stock.
There is almost no way for a typical US investor to know what is going on. This is not a recipe for investment success. Quo Vadis Capital, an independently registered investment advisor, said in a report on Friday that the stock is likely to go to zero.
Luckin did not comment on the price of his shares, but referred Barron’s a statement indicating the filing in Chapter 15 is routine “in the context of the Cayman restructuring … and should not be confused with a process of terminal bankruptcy involving the liquidation, sale or liquidation of the company.” Luckin is incorporated into the Cayman Islands.
Luckin is facing lawsuits in the US as investors try to recoup losses incurred as a result of its financial distortions. This is probably a factor behind his decision to file for bankruptcy protection in Chapter 15.
Investors may be familiar with Chapter 11, the typical US bankruptcy filing. Chapter 15 is similar, but for foreign companies. Luckin operates in China, even though its shares trade in the USA
“The company is negotiating with stakeholders on the restructuring of the company’s financial obligations, in order to strengthen the company’s balance sheet and allow it to exit Cayman Proceeding as an ongoing activity, for the benefit of all stakeholders,” the company’s release said on Friday. . 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 debtors, suppliers, employees and others. Although companies can come out of bankruptcy as a “continuing business” by selling coffee and croissants in Luckin’s case, the reorganization plans generally involve canceling existing shares. Creditors, not shareholders, are paid from the existing assets of a company.
Even if a company manages to list the shares again, the value of the outstanding shares will be very different, and the creditors will end up with most of the company reorganized.
Luckin shares are no longer traded on the stock exchange. Shares trade 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. First, neither party – the buyer and the seller – can easily look for credible quotes in an OTC framework. And an OTC transaction is between two parties. On a stock exchange, market makers aggregate orders for many market participants.
Luckin shares are now traded to experienced professional investors in bankruptcy or to traders who want to buy or sell a volatile stock quickly. For the rest of the investment community, it’s just a story to watch and not a stock to invest in.
Write to Al Root at [email protected]