Why Nio is spending $850 Million to Buy Shares of Its Subsidiary

Nio revealed 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.

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.

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.

The bailout had a catch: NIO gave up some assets

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.

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 (NASDAQ:TSLA) stock surged, auto investors began snapping up NIO’s American depositary shares.

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%.

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.

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