(Yicai Global) Nov. 2 -- Evergrande Health Industry Group, the main investor in in dispute with troubled electric car startup Faraday Future, is looking to coerce Jia Yueting into giving up control of the automaker he founded, according to two managers at the car company.
Evergrande Health is refusing to pay contracted supplementary fund for two reasons, news outlet Sina said in a report today, citing the senior of the two managers. First, it wants to delay mass production of the FF91 sedan so that Jia will have to hand over ownership. Second, this would lead to Faraday's bankruptcy, after which Evergrande Health could easily take over the company and force Jia out.
It is not clear whether Evergrande Health is refusing to pay a promised USD500 million because it cannot now do so, or whether it is simply an attempt to force Jia to give up his super voting rights on the board and seize control of the car firm.
Hong Kong-based Evergrande Health has already taken over Faraday's Chinese unit and made all the staff sign revised contracts. The unit of property developer China Evergrande Group wants US-based Faraday for its core technologies that lie at the heart of Jia's pursuit of Tesla and other electric carmakers. If Jia were forced to give up Faraday, his dream would be over, the other manager said.
The empty-pocketed entrepreneur has been unable to continue investment in the firm he co-founded in 2014 after the capital chain broke down at another firm he set up -- Leshi Internet Information & Technology -- in the fourth quarter of 2016. A lack of funds led to the suspension of Faraday's Nevada plant project. The FF91, unveiled in January last year, has stayed in the Beta stage and cannot go into mass production for lack of money. Faraday did not raise any funds at that time.
Faraday Future had hired a former BMW and Deutsche Bank chief financial officer to take charge of funding in March last year, but the company has not raised any cash.
In July last year, Jia left China amid a default crisis and took off for California to take charge of Faraday with a 'deadbeat' label on his forehead. Jia mortgaged several sea-side luxury homes he had bought in the US state for the debt-ridden Faraday while the company also pledged assets, such as its headquarters and factory buildings, for loans to maintain operations. Jia has publicly admitted that if the company is unable to raise any funds before the end of this year, it will go bankrupt.
In November last year, Hong Kong-based Season Smart -- a wholly-owned unit of Evergrande Health -- brought the automaker back to life by committing USD2 billion, including USD800 million in initial payment, for a 45 percent stake in Faraday. It was through this that Evergrande Health became a white knight investor in Faraday.
Their short-lived honeymoon ended this year. Jia submitted a request to the Hong Kong International Arbitration Centre to deprive Season Smart's financing consent over Faraday and terminate the previous deal, Evergrande Health said in a statement at the beginning of last month. Jia asked Evergrande Health to pay USD500 million in advance, in addition to the USD800 million paid already, so the two signed a supplementary agreement. But Faraday did not meet the new deal's requirements, forcing Evergrande Health to defer payment, the latter added.
According to the senior manager who spoke to Sina, Evergrande Health planned this outcome from the beginning. Faraday Future emphasized Jia's absolute control in its financing last year, so it had not raised any funds. Evergrande Health accepted the condition without hesitation.
Evergrande Health must have known that the FF91's production and delivery would be on time if everything went as planned, so it sought to cut off funding to force Jia to re-sign the contract, surrendering his super voting rights and handing over the keys of the company to Evergrande Health. Faraday had no other option but to ask for arbitration so as to continue raising cash. Who would break with his investors so publicly if there was any other way?, the senior manager asked.
Faraday Future did not raise any funds for over half a year because Jia wanted only a financial investor, the middle manager said. But investors did not accept those terms. They either insisted on voting based on shareholding or simply asked for Jia's resignation. Evergrande Health accepted all of Jia's conditions at that time and they reached an agreement, the manager added.
Where the Money Went
How did Faraday manage to spend the USD800 million in half a year? After the two signed the contract in last November, Evergrande Health began phased financing the following month. The total amount was USD800 million, but Evergrande Health held back USD200 million to develop the car firm's Chinese business, so Faraday received just USD600 million. It spent at least USD130 million to clear previous debts and loans with only USD460 million to USD470 million available, the senior manager said.
Faraday spent a part of the remaining funds on its plant in Hanford, California, which included renovations and the buying, assembly and calibration of equipment. It used another chunk on research team expenditure, including wages and promised bonuses to boost employee morale, and further recruitment to make up for talent loss. Yet another portion went to auto parts suppliers as advance payment, because the auto suppliers are not like those in the mobile phone sector in that they must invest a lot of money in research and customization, the senior manager added.
Outsiders found it unusual that FF used up the USD800 million in such a short time, the senior manager added. But insiders who know the industry are aware of how much it costs from Beta release to mass production and listing. Evergrande Health gave USD600 million to Faraday to make the prototype, but it tricked the company as the FF91's mass production deadline drew near by simply threatening Jia to give up or go bankrupt, the senior manager said.
Faraday claimed in a statement at the end of last month that it had won backing from the Hong Kong arbitrator, which said in an interim ruling that Evergrande Health cannot stop it from seeking financing through other channels.
But according to Evergrande Health's statement, the arbitration center rejected Faraday's request to deprive Evergrande Health of consent for financing and granted Faraday a financing right with strict conditions, including that any new shares cannot be at a discount to the agreement with Evergrande Health. Evergrande shall also enjoy the right of first refusal to new shares, with the financing cap set at USD500 million before the final arbitration.