A123 Systems sells itself to American arm of Wanxiang Group for $256.6 million

A123 Systems announced on Sunday that the company had reached an agreement with Wanxiang America Corporation to sell substantially all of A123's business, for $256.6 million, to the American subsidiary of the Wanxiang Group, the Chinese autoparts maker. This followed a weekend of bidding which began on December 6, and an announcement also on Sunday that Johnson Controls withdrew from the bidding process. The deal still must be approved by the bankruptcy court, and a hearing is scheduled for December 11, 2013.

The assets being sold are in two chunks, the largest of which goes to Wanxiang. That part includes business assets serving the automotive, grid energy storage and and commercial business markets. Historically, A123 Systems has sold battery cells and systems for more than automotive manufacturers. The company's product line also included power tool batteries at the low end, and large scale grid energy storage units comprising 10's of megawatts of electrical storage at the high end. The sale covers all technology, products, customer contracts and U.S. facilities in Michigan, Massachusetts and Missouri, the cathode powder manufacturing operations in China, and A123's equity in Shanghai Advanced Traction Battery Systems Co., A123’s joint venture with Shanghai Automotive.

The other, smaller, chunk is the portion of A123 Systems' business that deals in U.S. military contracts. This will be be acquired for $2.25 million by Navitas Systems, a Woodridge, Ill.-based provider of energy-enabled system solutions and energy storage products for commercial, industrial and government agency customers.

As we noted in an earlier report where it was learned the A123 bankruptcy process had stalled Fisker Karma production, the Strategic Materials Advisory Council wrote Treasury Secretary Timothy Geithner asking that the Committee on Foreign Investment in the United States (CFIUS) oppose the acquisition of U.S. battery manufacturer A123 Systems, Inc. by Chinese automotive parts manufacturer, Wanxiang Group Corporation. Generally speaking this sale of A123 Systems to a Chinese company plays into the hands of those who would portray the Obama green tech revolution as a failure, and also sees the rise of China as a danger. One wonders, then, if the rise of China is such a danger, then why do business leaders go to such lengths to set up business operations in China and the government has done much work for a couple decades to facilitate expansion of imports from China?

Advanced battery technology is critical to the future of America's automobile manufacturing, just as clean technology in general is critical to the future of America. One wonders why there are so many working so hard to delay the move towards clean technologies.

That the sale is to the Wanxiang America Corporation may be meant to skirt some criticism of the deal. The assets won't be directly owned by a Chinese company, but a subsidiary of a Chinese company.

“As we had hoped, the auction process for A123’s assets was robust and competitive. We are pleased with the result of the auction and believe that the selected bids from Wanxiang and Navitas maximize the value of A123’s assets for the benefit of our stakeholders. We expect that the sale will be approved by the Court, at which time we plan to execute the separate asset purchase agreements with Wanxiang and Navitas,” said Dave Vieau, Chief Executive Officer of A123. “We think we have structured this transaction to address potential national security concerns expressed during the review of our previous investment agreement with Wanxiang announced in August as well as to address concerns raised by the Department of Energy. We believe this transaction balances those risks with A123’s obligation to act in the best interest of our creditors.”

U.S. Rep. Bill Huizenga (R-Zeeland) issued a statement Monday afternoon saying “The technology developed by A123 is a core component to their work in the automotive, grid and telecommunications sectors. This core technology and intellectual property cannot be separated along A123’s business lines. Additionally, I have concerns regarding what safeguard are in place between Wanxiang and the government of China.”

U.S. Sen. Chuck Grassley (R-Iowa) said “Shortly before the election, this administration told the American people that A123’s government-financed technology would stay in the United States. This assurance turned out to be false. Now, we need to find out why the administration said this, what classified technology will be at risk, and whether the more than $100 million in taxpayer money given to A123 will end up in Wanxiang’s pockets.”

Rep. Marsha Blackburn (R-Tenn.) echo'd the same talking points Sen. Grassley was speaking from. "[A123's] forthcoming sale – potentially to a Chinese company – may put our national and economic security at risk unless the Obama Administration takes immediate action to protect it. ... The Obama Administration, through a body known as the Committee on Foreign Investment in the United States (CFIUS), can – and should – block the sale to Wanxiang on the grounds that it would harm U.S. interests. Once A123 Systems’ assets are in the hands of a foreign company, we simply can’t control who else is privy to its innovations. It’s not impossible to consider that the Chinese state – and its military leaders – would soon have access to the technology that supports our electrical and telecommunications grids as well as our troops."

It is worth pointing out that this chorus of negative voices all carry R's behind their name.

U.S. Dept. of Energy department spokesman Bill Gibbons said "The Energy Department worked through the bankruptcy process to ensure that the plants and equipment that were partially paid for by the Recovery Act would remain in Michigan, generating jobs and opportunity for American workers. We are pleased that all the bidders indicated they would keep those Michigan facilities operating, consistent with the intent of the grant. The winning bid was roughly twice the amount that had been paid on the grant, which is a clear indication about the value of this growing industry."

In withdrawing from the bidding process, Johnson Controls wishes to remind everyone that they the first in the world to produce Li-ion batteries for mass-production vehicles, and also launched the first U.S. facility to produce complete Li-ion battery cells and packs for hybrid and electric vehicles, in Holland, Mich. The company was recently named as one of the industry leaders in the Joint Center for Energy Storage Research $120 million energy research hub led by Argonne National Lab and funded by the U.S. Department of Energy (DOE). In 2009, Johnson Controls was awarded a $299 million matching grant by the DOE under the American Recovery and Reinvestment Act (ARRA) to build domestic manufacturing capacity for advanced batteries for hybrid and electric vehicles.

"While A123's automotive and government assets were complementary to Johnson Controls' portfolio and aligned with our long-term goals, Wanxiang's offer was beyond the value of those assets to Johnson Controls," said Alex Molinaroli, president, Johnson Controls Power Solutions. "Reports by other parties that our proposal involved an elimination of jobs in Michigan are inaccurate. Johnson Controls remains committed to the advanced battery industry and shares the Department of Energy's goal to advance the domestic capability in the United States."

A123 Systems entered bankruptcy proceedings after a year of struggles. The problems for A123 began last winter when A123 and Fisker Automotive jointly disclosed problems with battery packs that resulted in Fisker launching a recall to replace those battery packs. Later, A123 disclosed discovery of manufacturing defects in one of its battery pack manufacturing plants, that led to an expensive "field campaign" to replace those packs. The field campaign cost the company $55 million, throwing its financial status into a tizzy. Despite some bits of good news, in June A123 Systems warned it might be unable to continue as a going concern, and in mid-August the company reached a rescue deal with Wanxiang who would buy out A123.

The next steps are to obtain approval from both the bankruptcy court and the Committee for Foreign Investment in the United States (CIFIUS). Because Wanxiang's purchase price was smaller than the total amount owed to creditors, A123 does not anticipate any recoveries for its current shareholders and believes its stock to have no value. As is typical, shareholders are the biggest losers here.