INTERNET: Yidao Talks IPO, in Break with LeEco

Bottom line: Yidao’s announcement of plans for an IPO hint at a looming sale of the company by controlling stakeholder LeEco, which could be mulling sales of other recently purchased assets in a bid to ease its cash-crunch.

What do you do when you’re running low on cash? The answer is obvious for private car services firm Yidao: make an IPO. That would normally seem like a relatively smart and logical choice for most up-and-coming companies, but Yidao isn’t quite one of those. For starters, the company operates in an extremely competitive space now dominated by the likes of Didi Chuxing, UCar and Shouqi, just to name a few.

The other big factor weighing on the company is its majority ownership by cash-challenged online video company LeEco (Shenzhen: 300104). To be precise, LeEco paid $700 million for 70 percent of Yidao in 2015, back when both companies were far healthier than they are today. Thus this latest pronouncement that Yidao is even considering an IPO seems to hint that LeEco may be considering a sale of some of the many assets it acquired during a breakneck expansion that got it into its current mess.

If such a sale were indeed being considered, it could have big implications for some of LeEco’s other assets that might also be put up for sale. Chief among those might be its controlling stake of smartphone maker Coolpad (HKEx: 2369), as well as its stake in US new energy automaker Faraday Future.

We’ll return to the broader implications first, but let’s backtrack for a moment and look at the latest flurry of reports that began this week with rumors that Yidao was facing a cash crunch that was making it unable to pay some of its bills. This kind of rumor has been circulating for a while, not only for Yidao but just about every other LeEco unit as well. LeEco itself has been in cash conservation mode ever since last November, when its charismatic founder Jia Yueting admitted he may have expanded just a little too fast.

While such rumors have become commonplace, it’s been less common to see the affected companies directly address those rumors, which is what’s happened now. According to the latest reports, Yidao has issued a statement on its microblog saying the company’s business is essentially hunky dory, and that it’s moving ahead with money-raising plans. (Chinese article) But then it throws in a slight curve ball by saying that it will soon launch an IPO plan, without providing any more specifics.

For starters, I can’t really imagine that any investors would be interested in buying shares of this company, which is a decidedly second-tier player in an already fiercely competitive field. If Yidao were at all attractive, a more obvious fund-raising plan would be to sell the company to a more financially sound buyer like UCar or even Shouqi.

Sale Coming?

But the fact that Yidao is considering an IPO strongly implies that LeEco is considering a sale of some or all of its stake in the company, since the latter currently owns 70 percent of the former. Of course its possible Yidao could simply issue new shares and dilute LeEco’s stake, or that holders of the other 30 percent of Yidao could put their shares into the IPO.

But the fact of the matter is that LeEco right now could sorely use the $700 million it paid for Yidao two years ago. Not that it could ever hope to get that much back for the investment, which it probably overpaid for to begin with. But even if it could recoup one half of that amount, it could almost certainly put the money to good use to pay some of its suppliers for its core online entertainment services.

That brings us to the broader picture that I raised at the outset of this post, namely that LeEco may be quietly evaluating some of its purchases and considering partial or complete sales of some to raise cash. Such an option certainly looks logical for a company in LeEco’s situation. The fact of the matter is that LeEco ran a fairly successful online video platform before it suddenly went on steroids with its buying spree that took into such unfamiliar and unrelated areas as new energy cars, smartphones and private car services.

All that said, this could be a golden opportunity for some opportunistic buyers if LeEco is really considering such a fire sale. Truth be told, Coolpad and Yidao are probably fairly decent assets for the right buyer, and even Faraday Future might be attractive to someone with the necessary background and experience. I doubt IPOs will be the final route for any of these assets, as professional investors aren’t likely to be interested. But I do see the strong possibility of some fire sales, with Yidao and Coolpad as two of the likeliest first to go.