Tuesday, October 16, 2012

A123 Systems Files Bankruptcy; Agrees To Be Sold to Johnson Controls, Inc

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 founded 125 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.

We’ll have more news for you as developments come forth.


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