A123 Systems veers from Wanxiang to Johnson Controls and bankruptcy
A123 Systems long troubled year is finally, and unsurprisingly, heading into bankruptcy. Bankruptcy in this case does not mean a complete collapse and disappearance of A123's battery technology, but instead it is a Chapter 11 bankruptcy accompanied by a sale of technology and assets to Johnson Controls. That company already has a business in making lithium-ion batteries, making this a story of consolidation within the lithium battery industry. It also means A123 Systems is backing out of the earlier announced rescue buyout by the Chinese corporation Wanxiang, that was meeting with understandable political pressure.
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. Amid the bad news the company has also had good news, including deals to supply battery packs to SAIC (the Chinese automaker) and Tata (the Indian automaker). Another piece of good news was the Nanophosphate EXT technology that would open new markets to A123 and make their batteries even more compelling. But in June A123 did warn that the company might cease as a going concern, and finally in mid-August the company reached a rescue deal with Wanxiang, the Chinese autoparts maker, who would buy out A123. That deal was contingent on a list of conditions, and as recently as SEC filings yesterday was still in process. This morning, however, news was released that A123 is backing away from the Wanxiang deal and instead agreeing to a packaged bankruptcy and sale of technology and assets to Johnson Control.
To summarize all that, A123's problems stem from two factors. First is quality problems in the company's battery packs, that led to expensive replacement and warranty costs. That alone threw a hand grenade into the middle of the company's financial balance. Second, is the failure of Fisker Automotive to ramp up production of the Fisker Karma and Fisker Atlantic as expected. The Atlantic was originally slated to begin production at the end of this year, which would have put A123 in the position of ramping up battery pack production to supply packs for the Atlantic. Instead, Fisker has had its own litany of problems, the most serious of which was the Dept. of Energy freezing loans to Fisker, that caused Fisker to halt work at the company's factory in Delaware to prepare for manufacturing of the Atlantic. Despite attacks from Republicans, Fisker Automotive is not a 'Loser' but a struggling start-up that is raising an amazing amount of investment capital to replace the frozen Dept of Energy loans and get back on track with production of the Atlantic.
Today the company announced an agreement to sell its automotive business assets to Johnson Controls, in a deal valued at $125 million. To facilitate the deal, A123 Systems filed for chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware. Other parties may be able to broker a better deal for A123's assets than Johnson Controls' offer.
"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. We determined not to move forward with the previously announced Wanxiang agreement as a result of unanticipated and significant challenges to its completion," A123 CEO David Vieau said in a statement, "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."