[Exclusive] China's Taojiji Clinches Debt Deal With Online Shop Owners
Wang Hai
DATE:  Oct 17 2019
/ SOURCE:  yicai
[Exclusive] China's Taojiji Clinches Debt Deal With Online Shop Owners [Exclusive] China's Taojiji Clinches Debt Deal With Online Shop Owners

(Yicai Global) Oct. 16 -- Taojiji, a Chinese e-commerce platform that has struggled to pay its vendors, has reached an accord with them that will see shop owners reimbursed in installments or made shareholders and partners in the online site.

Faced with a payments crisis, founder Zhang Zhengping held lengthy negotiations with representatives of merchants from the provinces of Guangdong, Fujian, Zhejiang, Hubei, Anhui and Hebei. The parties sealed a deal in the early hours of this morning.

The Shanghai-based business is offering two options, with vendors free to choose between a debt rescheduling or a debt-for-equity swap, Yicai Global learned from participants in the talks. It now plans to shift from being a marketplace that hosts merchants to one self-owned and run by partners.

Set up by Shanghai Huanshou Industrial just over a year ago, Taojiji embraced a strategy similar to that of Pinduoduo, investing heavily to attract buyers in third and fourth-tier cities. It has since emerged as China's biggest online trading market, serving 800 million consumers who earn less than CNY2,000 (USD282.90) a month. But it spent too much time seeking financing, landing the business in debt trouble, Zhang said in an open letter posted on his Weibo account yesterday.

Last month, Taojiji offered a repayment plan after merchants stormed its headquarters looking for money, news outlet Tech Ifeng reported. Representatives of the main vendors signed contracts today for a debt-to-equity exchange, but some small- and mid-sized vendors have yet to decide.

The Two Options

Under the debt-to-equity plan, Taojiji will convert payment for goods owed to shop owners into stakes in the platform based on a valuation of USD550 million. According to Chinese law, a limited liability company can have a maximum of 50 shareholders, while the figure is 200 for a joint-stock firm. So the vendors must acquiesce to Zhang holding the equity on their behalf.

According to the debt restructuring route, Taojiji will repay 20 percent within 15 working days after receiving the acquisition price paid by the restructuring parties. Then 10 percent of the remaining debt will be repaid within three months when the valuation of the target company reaches USD1.5 billion. The remaining 70 percent will be paid in three months when the target company is worth USD2 billion or it succeeds in going public.

Fundraising Efforts

The firm initiated an A-round fundraising last October and secured USD42 million, with its valuation reaching USD242 million. Investors included US hedge fund Tiger Management, Russia's Digital Sky Technologies and Chinese venture capital firm K2VC.

In June, Taojiji launched a B-round, planning to raise USD200 million for a valuation of USD800 million. It reached an agreement of intent with investors, but funds failed to reach Taojiji for the next three months. Sources told Yicai Global that the investors wanted to hold on and further evaluate the platform's performance in terms of growth in user data.

To obtain the funds, Zhang chose to take advantage of the accounts payable cycle, using part of the ship owners' money to invest in marketing and pull in new users. The idea was that if the growth rate in user numbers rose, the platform would get its investment.

But it didn't turn out that way, leading to a further extension of the deadline for repayments to merchants. As a result, the capital chain for daily operations began to unravel.

On Sept. 25, the merchants came together in a bid to protect their rights and interests and the issue began to ferment. Zhang used the recent weeklong National Day holiday to urgently discuss the restructuring plans with interested parties.

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Keywords:   Taojiji,E-commerce,Debt restructuring