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Why Is NIO Spending $850 Million to Buy Shares of Its Subsidiary?

By John Rosevear - Feb 4, 2021 at 10:28AM

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There's a good reason, and it's explained here.

Chinese electric-vehicle maker NIO (NIO -9.03%) said in a regulatory filing on Feb. 4 that it is spending 5.5 billion yuan, or about $850 million, to purchase 3.305% of an entity called NIO China from two investors. 

What does that mean? I'm glad you asked. 

A year ago, NIO was in deep trouble

NIO is in great shape now, but that wasn't true a year ago. In early 2020, amid the worst of China's COVID-19 breakout, NIO was very close to running out of cash. (How close? NIO may have had to borrow money to cover its monthly payroll last February.)

With its stock languishing around $3, the company didn't have a lot of options, and it looked as if it might be close to going bust. But in April, it made a deal with economic development authorities in China's Anhui province and its capital city of Hefei: In exchange for some equity -- more on that in a moment -- and a promise to relocate its headquarters to Hefei, the authorities would invest about $1 billion, enough to get NIO back on its feet. 

A blue NIO EC6, an upscale sporty electric crossover SUV.

Last spring's cash infusion gave NIO enough to get its EC6 into production in September. Image source: NIO.

The bailout had a catch: NIO gave up some assets

Here's how the equity thing worked. NIO put all of its assets in China into a legal entity called NIO China. In return, it got a 75.9% stake in NIO China -- or, put another way, its new investors owned 24.1% of all of NIO's assets in China. (Side note: NIO has some assets outside of China, including a tech center in California. Those weren't included in the deal.)

That was a little dicey for U.S. investors -- a share of NIO bought you a share of a company that owned only three-quarters of NIO's Chinese assets -- but it was good enough. NIO was back on its feet, and after watching the way Tesla's (TSLA -7.46%) stock surged, auto investors began snapping up NIO's American depositary shares. 

NIO Chart

NIO data by YCharts

NIO's stock jumped, and it began buying back those assets 

By August, NIO's stock had risen to nearly $20, high enough that a capital raise seemed worthwhile. NIO sold stock, raised about $1.5 billion, and used part of the proceeds to buy back some of what it had given up in the bailout: It raised its stake in NIO China from 75.9% to 86.4%. 

What's happening now: Another buyback

NIO has raised capital two more times since August, using the money to bolster its balance sheet, invest in new technologies, and -- now -- to do another buyback.

As I mentioned above, NIO will spend 5.5 billion yuan to buy back 3.305% of NIO China from two of its "strategic investors." In addition, NIO is putting 10 billion yuan (about $1.55 billion) into NIO China (an accounting move) in exchange for some newly issued shares.

The upshot: Once these transactions close, NIO will own 90.360% of NIO China.

Is this bullish?

I think so. For American investors, owning 90% of NIO China is better than owning 86% (or 76%), because NIO China is most of the company's business right now. NIO is giving up some capital to do that, but it's capital that NIO can afford to spend.

We'll learn more when NIO reports its 2020 earnings, likely later this month. 

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