Luckin Founder to Cash Out of Rental Car Unit

A company controlled by the founder of scandal-plagued Luckin Coffee Inc. has agreed to sell its 21.26% stake in one of China’s leading car rental firms, potentially raising $100 million or more for Lu Zhengyao as his business empire comes under growing financial stress.

The Monday announcement, which would mark an end to Lu’s financial relationship with Car Inc., sparked a major rally for the company’s shares, which ended nearly 24% higher on the day. But even after the rally, the stock still trades at about half of what it did in early April before Luckin first admitted to massive revenue inflation in the final three quarters of last year.

The latest deal would see Ucar Inc., a limousine services provider controlled by Lu, sell up to all of its holdings of about 450.8 million Car Inc. shares to Beijing Automotive Group Co. Ltd. (BAIC Group), a major carmaker whose joint venture partners include Germany’s Daimler AG, according to the announcement. No price was given for the sale. But if sold at Car Inc.’s Friday closing price, the sale would generate about HK$811 ($105 million) in cash for Ucar.

“The details and terms of the cooperation between Ucar and BAIC Group are still under negotiation and no definitive term has been agreed as of the date of this announcement,” Car Inc. said.

Ucar had originally planned to sell down most of its stake in Car Inc. to an entity owned by U.S. private equity giant Warburg Pincus, which was also one of Car Inc.’s early investors.

Ucar was previously Car Inc.’s largest shareholder, but announced late in April it would sell down its stake in the company in two tranches to the Warburg-owned entity. The first tranche sale was completed the same day of the announcement, and saw Ucar sell 4.65% of Car Inc.’s shares for HK$2.30 each, raising HK$227 million.

The second tranche of the deal would have seen Ucar sell another 12.46% of Car Inc.’s shares to Warburg, reducing Ucar’s own stake to 8.81%. But in the latest Monday announcement, Car Inc. said that Warburg and Ucar decided to terminate that second tranche of the deal, which had carried a price tag of HK$3.40 per share.

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If BAIC buys the entire 21.26% of Car Inc.’s shares still held by Ucar, it would become Car Inc.’s second largest shareholder behind only Legend Holdings, parent of PC giant Lenovo, which owned 26.6% when Car Inc. filed its latest annual report on April 1.

Such a sale would end the financial relationship between Lu, who also goes by Charles Lu, and Car Inc., one of the original companies at the center of his current business empire. A high-level executive at Luckin previously told Caixin that Lu and other top executives at Car Inc. were already considering leaving their management positions at the company.

Ucar already has a relationship with BAIC through a previous deal, which saw the former buy 67% of the nearly-defunct German car brand Borgward from BAIC’s Beiqi Foton unit last year for nearly 4 billion yuan ($560 million). But now Ucar may be having difficulty repaying both the purchase price and the large debt that Borgward owes to Beiqi, based on an April stock exchange filing by Beiqi Foton.

Another sign of financial stress appeared in Lu’s empire shortly after the Luckin fraud was first disclosed in early April. That development saw Haode Investment Inc., an entity controlled by Lu, fail to make a payment on a $518 million margin loan facility syndicated by Goldman Sachs, Barclays, CICC, Haitong International, Morgan Stanley and Credit Suisse. Lu had pledged his shares in Luckin to help guarantee the facility.

Contact reporters Yang Ge (geyang@caixin.com)