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The Chinese chain said it is in negotiations with stakeholders to restructure its balance sheet.
Fred Dufour / AFP via Getty Images
Luckin coffee
applies for bankruptcy protection. It is another step in the complicated story of the controversial Chinese retail chain.
Usually bankruptcy ultimately renders a company’s stock worthless. However, the Luckin stock (ticker: LKNCY) was trading for more than $ 12 before the announcement and was still north of $ 7 Friday after the news.
That gives the coffee chain a market capitalization of about $ 1.6 billion. What is going on? Is there $ 1.6 billion in value left in Luckin for existing shareholders, and should people consider investing in the troubled company?
Luckin has had a hard time. Last February, the company denied that it had inflated its sales, but in April it had formed a committee to investigate the claims. In May, management changed, and in July, the company said sales had inflated by more than $ 300 million in 2019.
The answer to both questions – whether there is $ 1.6 billion in value in the company and whether investors should rethink the stock – is almost certainly not. There are still shops. But the company’s management is new. Luckin ‘hasn’t filed financial statements for a long time, and no more analysts track the stock.
There is almost no way for a typical American investor to know what’s going on. That’s not a recipe for investment success. Quo Vadis Capital, an independent registered investment advisor, said in a report on Friday that the stock is likely to drop to zero.
Luckin did not comment on the stock price, but did refer Barron’s on a statement indicating that the Chapter 15 filing is routine “in the context of Cayman’s restructuring … and should not be confused with a final bankruptcy process involving the winding down, sale or liquidation of the company.” Luckin is incorporated in the Cayman Islands.
Luckin is facing legal action in the US as investors try to make up for losses incurred as a result of financial inaccuracies. That’s probably a factor behind his decision to file for Chapter 15 bankruptcy protection.
Investors may be familiar with Chapter 11, the typical U.S. bankruptcy filing. Chapter 15 is similar, but for foreign firms. Luckin operates in China, although its shares are traded in the US
“The Company is negotiating with its stakeholders to restructure the Company’s financial liabilities to strengthen the Company’s balance sheet and ensure it can emerge from the Cayman Process as a continuity for the benefit of all stakeholders”, the company news reads on Friday. release. The Cayman lawsuit is a restructuring effort that the company announced in July.
Most importantly, ‘Stakeholders’ and ‘shareholders’ are not synonymous. Shareholders are a group of a company’s stakeholders, along with debtors, suppliers, employees and others. While companies can come out of bankruptcy as a going concern, they sell coffee and croissants in Luckin’s case, but restructuring plans typically involve the cancellation of existing shares. Creditors, not shareholders, are paid from a company’s existing assets.
Even if a company manages to list shares again, the number of shares outstanding will be very different and the creditors will end up with the lion’s share of the reorganized company.
Luckin shares are no longer traded on an exchange. Shares are traded on the over-the-counter or OTC market. Two parties – through brokers – can still trade shares, but it is not the same as trading on a stock exchange. For one thing, neither party – the merchant and the seller – can easily look up credible quotes in an OTC environment. And an OTC trade is between two parties. At a fair, market makers collect orders for many market participants.
Trade Luckin stocks now in the realm of professional investors with bankruptcy experience or traders looking to buy or sell a quick dollar of a volatile stock. 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]