What happened
Shares of RISE Education Cayman (REDU), a Chinese education company that specializes in English-language tutoring for kids, were soaring today after it announced that its merger with Dada Auto would close after market hours.
It was unclear why the news sent the stock gaining so much today. One possible explanation is that investors were skeptical that the deal would go through after RISE received a delisting warning from the Nasdaq, but those concerns have now been relieved.
The stock closed up 138.5%.
Image source: Getty Images.
So what
Trading in RISE Education was halted this morning pending news, and the stock rose steadily throughout the morning.
The company issued a press release at 12:32 p.m. ET saying that it expects to close the merger with Dada Auto after market hours today. As a result of the transaction, the company will change its name to NaaS Technology. It will also change the ratio of company shares to American depositary shares (ADSs) from two to 10, having the effect of a 1-for-5 reverse split on ADSs, though that doesn't explain the stock's pop today.
The business case for the merger, which was announced in February, seems thin at best. Dada Auto is an electric vehicle (EV) company, and RISE is an education company. According to the terms of the merger, RISE shareholders will own just 7.1% of the new company, so it will almost entirely be an EV company.
That may also explain the surge in the stock as Chinese education stocks have been pummeled after a government crackdown, while EV stocks still enjoy a healthy premium due to high expectations for future growth in the EV market in China.
Now what
Despite today's gains, RISE is still down by about two-thirds over the past three years. Given the fact that today's gains look suspicious and the justification for the merger seems weak, the stock could easily pull back in the coming weeks.
