What happened
Shares of Chinese electric-vehicle maker NIO (NIO +1.20%) were trading lower on high volume on Monday morning, after the company's secondary offering priced at a discount to Friday's closing price.
As of 10 a.m. EDT, NIO's American depositary shares were trading at $17.77, down about 4% from Friday's closing price.
So what
NIO said on Monday morning that it had sold about 20% more American depositary shares than planned, 88.5 million versus 75 million. But those shares were sold at a discount: While NIO's stock closed at $18.50 on Friday, the secondary offering was sold at just $17, a price that (at least in theory) ensured a quick profit for the buyers.
NIO plans to spend about $1 billion to buy back some of what it gave up to secure a bailout deal in May. Image source: NIO.
Why did NIO's offering have to be sold at a discount at a time when auto investors are eagerly snapping up shares of electric-vehicle companies? The answer might have to do with NIO's plans for the proceeds, which, while arguably bullish, aren't easy to understand, and aren't directly related to the kinds of things that tend to get technology investors' attention.
Here's the gist: NIO plans to use the bulk of the proceeds, roughly $1 billion, to increase its stake in a subsidiary that holds all of its Chinese assets. NIO had to create that subsidiary -- and importantly, had to give up 24.1% of it -- as part of a $1 billion bailout deal with economic-development authorities that closed in May.
Now what
If all goes as planned, NIO's stake in that subsidiary (which the company refers to as "NIO China") will rise from 75.9% now to 86.4%. Roughly $600 million of that $1 billion will go into the subsidiary as cash available to NIO's China business; the remainder will go to some of its investors to buy back shares of NIO China.
NIO will use the balance of the proceeds, roughly $500 million, to fund its self-driving development effort, for market development outside of China, and for general corporate purposes, it said.
There are good reasons to think that this plan is bullish for U.S. investors over the long term. But the discount -- and the dilution caused by those 88.5 million news shares -- could continue to drive volatility in NIO's stock price for the next little while.
