FLJ Group (NASDAQ: FLJ) stock is up 115% on the announcement of a deal in China. This looks, umm, interesting. For it’s not obvious that it’s a good deal and it’s even not obvious quite how it’s going to be paid for.
As background FLJ recently dumped its apartment rental business: “ FLJ Group Limited (NASDAQ: FLJ), announced that it entered into an equity transfer agreement on October 31, 2023 to sell all of its equity interest in its indirectly wholly-owned subsidiary Haoju (Shanghai) Artificial Intelligence Technology Co., Ltd. ( the “WFOE”), a limited company incorporated under the laws of PRC, to Wangxiancai Limited, a limited company incorporated under the laws of Hong Kong, for nominal consideration (the “Disposal”). The Disposal was completed on the same date. Through the WFOE and the WFOE’s subsidiaries, the Company carried out its long-term apartment rental business (the “Disposed Business”). The Disposed Business contributed substantially all revenue and held substantially all of the assets of the Company prior to the Disposal.” It also bought an online lifestyle retailer at the same time: “As previously announced, the Company entered into an equity acquisition agreement (the “Acquisition”) on September 29, 2023 with certain shareholders of Lianlian Holdings Inc. (“Lianlian”) to acquire 95% of Lianlian’s issued and outstanding shares. Lianlian is an online lifestyle service provider headquartered in Chengdu, China, providing comprehensive marketing and promotion services to restaurants, hotels and other leisure and entertainment merchants, helping them achieve cost-effective operations. Leveraging Lianlian’s e-commerce platform, merchants can effectively reach end consumers to fulfill their daily needs for food, travel and other lifestyle services.” We tend to think that sounds like a Chinese version of Groupon. But there we are.
FLJ Group stock price from Google Finance
This latest deal doesn’t have even that amount of industrial logic behind it: “FLJ Group Limited (NASDAQ: FLJ) (“FLJ” or the “Company”), today entered into an equity acquisition agreement (the “Equity Acquisition Agreement”) with Alpha Mind Technology Limited (the “Target Company” or “Alpha Mind”) and the Target Company’s shareholders (the “Sellers”) to acquire all the issued and outstanding shares in the Target Company for an aggregate purchase price of US$180,000,000 or RMB equivalent (the “Acquisition”). Upon the closing of the Acquisition, Alpha Mind will become a wholly-owned subsidiary of the Company. At Closing, the Company shall deliver to each of the Sellers a promissory note (collectively, the “Notes”) in an aggregate amount equal to the purchase price. The Notes have a maturity of 90 days from the closing date, and will be secured by all of the issued and outstanding equity of the Target Company and all of the assets of the Target Company and its subsidiaries.”
So, FLJ has three months to work out how it’s going to pay for this $180 million. Which is a pretty high price for a company near flatlining on $40 million or so a year of revenues. There’s no obvious source of finance to do that. Other than, you know, the Nasdaq shareholding base. So we might expect there to be some stock issuance soon enough.
No, we’d not be buying into such an issue. We think this has disaster written all over it.
