AONE A123 Systems, Inc. (MM)

Johnson Controls Inc. (JCI) has agreed to buy the automotive operations of Waltham, Massachusetts based lithium-ion battery maker A123 Systems Inc. (AONE) for $125 million. The Milwaukee, Wisconsin-based batter maker will acquire A123’s automotive business assets, including automotive technology, products and customer contracts.

Johnson Controls will also buy A123’s facilities in Livonia and Romulus, Michigan; cathode powder manufacturing facilities in China; equity interest in Shanghai Advanced Traction Battery Systems Co.; as well as its joint venture with Shanghai Automotive Industry Corporation ("SAIC").

A123 and all of its U.S. subsidiaries have already filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court. The company is expected to receive $72.5 million from Johnson Controls as “debtor in possession” financing to support its operations during the sale process.

In the meantime, China’s Wanxiang Group revealed that it will place superior bid for A123 compared to what Johnson Control has offered as the deal with the latter is subject to a court-supervised auction. However, Wanxiang, which will submit its proposals next week, is yet to receive approvals from the Committee on Foreign Investment in the U.S. and the government of China for the acquisition.

What went wrong with A123?

A123 had tough times dealing with lower orders for Karma plug-in hybrid from its leading customer Fisker Automotive (which has generated 26% of the company’s revenues in 2011) in October last year and a costly recall of battery packs made for the same company this year.

A123 was also highly disappointed with its failed $465 million deal with Wanxiang. At the beginning, Wanxiang gave $22.5 million loan to A123, including a cash advance of $12.5 million.

Future cash flow from Wanxiang were dependent on meeting certain requirements by A123, such as getting approval from the Committee of Foreign Investment and the Chinese government as well as the absence of any default. However, A123 failed to meet some of those conditions and the deal failed shortly before its bankruptcy filing.

Lastly, weaker-than-expected demand for hybrids had adversely affected the company’s bottom line. All these factors led to bankruptcy filing of the company that is only 11 years old.

D.O.E. Grant

The U.S. Department of Energy (D.O.E.) granted nearly $90 billion for several clean-energy programs in 2009 through the administration’s stimulus package. About $813 million of the total amount went to energy companies that eventually filed for bankruptcy, including a $249 million grant to A123 and a loan to solar panel manufacturer Solyndra.

Under the American Recovery and Reinvestment Act’s Electric Drive Vehicle Battery and Component Manufacturing Initiative, A123 was supposed to create 38,000 jobs in the U.S., including 5,900 jobs at its own plants. Johnson Controls also received $299 million grant under the same program.

Till date, A123 has utilized $132 million of the D.O.E. grant, which is about half of the total amount. D.O.E. will decide on the remaining grant later after the new owner of A123 takes control.

Conclusion

The $18.0 billion company, Johnson Controls, believes the acquisition of A123 assets will strengthen its existing portfolio and help maintain the market leading position. The company is optimistic about the fuel-efficient vehicles market. It is confident that newer technologies in powertrain and energy storage solutions will be implemented over the coming years.

Johnson Controls revealed a 15% growth in net income to $441 million in the third quarter of its fiscal year ending September 30, 2012 from $383 million in the comparable quarter of prior year. On per share basis, adjusted net income grew 14% to 64 cents from 56 cents a year ago. (All excluding non-recurring items)

However, earnings per share lagged the Zacks Consensus Estimate by 3 cents. It was lower than the management’s expectation as well, which projected earnings to improve 20% on a year-over-year basis for the quarter. The company is scheduled to release its fiscal year results on October 30.

 

 
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