A123 Systems and the Wanxiang Group of China signed definitive agreements today over Wanxiang's strategic investment in A123. The agreements cover a set of loans, senior convertible notes, and stock warrants, that if fully executed would total $465 million and leave Wanxiang with an 80% ownership stake in A123 Systems. Todays agreement follows the memorandum of understanding the companies signed last week.
The Wanxiang Group is the largest autoparts company in China, and already has a significant business in electric vehicle batteries. According to a presentation on the corporate home page, electric buses using Wanxiang batteries have been in operation since 2006 accumulating millions of miles of running experience, and electric vehicles and hybrid vehicles using Wanxiang drive train equipment are in operation in 22 cities in China.
The agreement is made up of three forms of financing, each of which are subject to approval from others.
Initially Wanxiang will provide up to $75 million debt financing in a Senior Secured Bridge Facility. Of that, an initial credit extension of $25 million is expected this week. The remaining $50 million will be funded after satisfying certain conditions. These include a favorable determination from the Committee on Foreign Investment in the U.S. and Chinese government approval.
Next, Wanxiang will purchase, after satisfying certain conditions, $200 million of A123's 8% Senior Secured Convertible Notes. These corporate bonds are subject to approval from A123's shareholders, and expiration of a waiting period during which the companies will file details with the U.S. Federal Trade Commission and Department of Justice and those agencies determine whether the transaction will not adversely affect U.S. commerce under the antitrust laws (Hart-Scott-Rodino wating period). Another condition is redemption or retirement of outstanding 6% Senior Convertible Notes or at least 90% of A123's outstanding 3.75% Convertible Subordinated Notes.
Finally, Wanxiang can potentially invest an additional $190 million by exercising stock warrants issued in connection with the Bridge Facility and Convertible Notes.
According to the A123's quarterly filing released last week, the terms of the companies existing credit facility required that A123 maintain an unrestricted cash balance of at least $40.0 million. As of June 30, 2012 the company had $47.7 million of cash and cash equivalents and was burning through $18.0 million to $25.0 million per month and had expected to fall below the $40 million minimum by August 2012. If A123 cannot satisfy the conditions from Wanxiang, the quarterly filing warns that the agreement will fall apart and A123 is likely to have to go into bankruptcy.
The company has been struggling with bad news since last Christmas, when A123 and Fisker Automotive revealed problems in battery packs A123 had built for Fisker. Problems became so bad that the company issued a warning recently that the company may be unable to continue as a going concern. The biggest bright spot in A123's recent history is development of the Nanophosphate EXT technology that promises full battery performance in a wider range of temperatures.
This is part of a pattern of Chinafication of America's clean technology companies. A pattern which is rightfully alarming to many, but what should be more alarming is how the U.S. risks losing out to China in clean technologies due to the vast difference in support in each country for those technologies. At the same time A123 has had business activities in China since 2009, via a joint venture with SAIC, and China is a large and growing market and any self-respecting capitalist would be a fool to ignore opportunities in that country.