Published October 16, 2012
By Jeff Cobb
After stating in a regulatory filing today it could not meet debt obligations, and was headed toward bankruptcy, ailing battery maker A123 Systems, Inc.. has announced it has agreed to be sold to Johnson Controls, Inc. (JCI).
The $125 million purchase agreement will prevent the assets and intellectual property of the government subsidized company from going to China?s largest auto parts maker, which intended to invest as much as $465 million which would have entitled it to an 80-percent share of A123.
"We believe the asset purchase agreement with Johnson Controls, coupled with a Chapter 11 filing, is in the best interests of A123 and its stakeholders at this time," said David Vieau, Chief Executive Officer of A123. "We determined not to move forward with the previously announced Wanxiang agreement as a result of unanticipated and significant challenges to its completion.
Since disclosing the Wanxiang agreement, we have simultaneously been evaluating contingencies, and we are pleased that Johnson Controls recognizes the inherent value of our automotive technology and automotive business assets. We are also pleased that we have received indications of interest that recognize the value of our grid and commercial businesses. We are encouraged by the significant interest we have received, as multiple parties have submitted proposals for these businesses. As we move through this transaction process, we expect to continue operating and working with customers and suppliers."
Under the terms of the agreement, JCI will acquire A123's automotive business assets, including all of its technology, products and contracts with customers.
One of its customers is Fisker Automotive, with which A123 suffered a severe financial setback this year following a recall for Karma propulsion batteries. Another is General Motors, which is engineering its pending Spark EV to utilize A123 technology.
Today GM'S Kevin M. Kelly, Manager, Electric Vehicle and Hybrid Communications, offered no comment whether A123 batteries systems would still be used assuming the JCI deal goes through.
Others have speculated that it will, but this remains to be seen.
Today A123?s regulatory filing declared it won?t be able to pay an interest installment due today on $143.8 million in obligations expiring 2016, nor will it make a $2.76 payment due today on outstanding 6 percent notes.
It has suffered 14 consecutive quarterly losses and seen its stock price slashed by 85 percent.
The Deal
The agreement with JCI includes A123?s facilities in Livonia and Romulus, Mich. and its cathode powder manufacturing facilities in China along with its equity in Shanghai Advanced Traction Battery Systems Co., A123's joint venture with Shanghai Automotive.
The purchase further includes provisions through which Johnson Controls intends to license back to A123 technology for its grid, commercial and government businesses.
A123 said it is also continuing ongoing talks regarding strategic alternatives for its grid, commercial, government and other operations, and has received several indications of interest for these businesses.
Today A123 and its U.S. subsidiaries all filed voluntary Chapter 11 petitions for reorganization at the U.S. Bankruptcy Court in Delaware. This action did not include its non-US companies.
The aim of this move was to facilitate the transaction with JCI for an orderly sale of A123?s automotive and other U.S. assets and maximize value for shareholders.
A123 has also received a $72.5 million commitment form JCI for ?debtor in possession? financing to allow its continued operations pending finalization of the sale.
It has also filed to necessary court authorization requests to continue business operations during the bankruptcy and sale which would include paying salaries and benefits.
The transaction is being viewed by JCI as a win ? if not actually a windfall. In any case, Alex Molinaroli, president, Johnson Controls Power Solutions offered an official statement:
"Our interest in A123 Systems is consistent with our long-term growth strategies and overall commitment to the development of the advanced battery industry," Molinaroli said. "Requirements for more energy efficient vehicles continue to increase, which is driving automotive manufacturers to pursue new technologies across a broad spectrum of powertrains and associated energy storage solutions. We believe that A123's automotive capabilities are a good complement to our existing portfolio and will further advance Johnson Controls' position as a market leader in this industry."
Political Train Wreck Avoided?
Did A123 narrowly avoid being labeled "the next Solyndra?" While too soon to tell what the publicity fallout will be, it would appear the sale to Johnson Controls, a company begun 127 years ago in the U.S. and major supplier today, will prevent the brunt of criticism that would have come if A123 sold to the Chinese.
The politicized element of A123?s financial woes have not been lost on House Republicans and others given in 2009 the company received a federal grant of $249.1 million.
We have seen how some have decried the prospect of the government betting on ?winners and losers? following the September 2011 bankruptcy filing for solar panel maker, Solyndra.
Even an otherwise advocate of alternative energy and champion of the Chevy Volt, former General Motors Vice Chairman Bob Lutz, has had things to say about A123 such as in an August Forbes editorial where he warned the government can?t mandate a market and A123 was ceding technology to Chinese interests.
Not long after the news broke today, the advocacy group Plug In America offered a commentary as well, perhaps as preemptive to more criticism that may follow by those who will spin the A123 deal as falling short of a success story for the Massachusetts company.
"Government can help facilitate innovation, but the natural business cycle remains - some failures in any emerging industry are inevitable," said Jay Friedland, Plug In America's legislative director. "Yet, our country is experiencing tremendous success as we electrify transportation. A raft of companies - Johnson Controls, Envia, Saft, GM, and LG Chem among them - are making great strides in driving down battery costs while creating a U.S.-based manufacturing sector for battery technology. This drives down the cost of plug-in vehicles while creating jobs and keeping at home the $1-billion per day we're currently sending overseas for oil, creating a better, safer America."
Plug In America offered also "other key considerations" from the U.S. Dept. of Energy:
"The advanced battery market is expanding dramatically in the United States and around the world -- from $5 billion in 2010 to nearly $50 billion in 2020, an average annual growth rate of roughly 25 percent," it said.
And whether some try to spin a partisan divide, this is not true according to the advocacy group which has tracked its progress from the beginning.
"A123?s promising technology has a long history of bipartisan support. In 2007, the company received a $6 million dollar grant as part of the Bush Administration's efforts to promote advanced battery manufacturing,
Prior to this investment, Plug In America continued, a battery with a 100 mile range cost $33,000. Because of technology improvements and the high volume manufacturing capability we have today, the estimated cost is down to about $17,000 and is expected to drop to $10,000 by 2015. As costs come down even further, the market for hybrids and electric vehicles ? which has nearly doubled in the U.S. since last year ? will grow even further."
So while electrified vehicle advocates are bracing themselves for accusations of "failure" such as were uttered in the presidential debates by the Republican side pertaining to Tesla, and Fisker, proof does exist, says Friedland, that significant progress was made on the government's investment.
We?ll have more news for you as developments come forth.
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