What's the big deal with A123? Maybe a deal is the deal
|Dustin Walsh covers auto suppliers for Crain's Detroit Business, an affiliate of Automotive News.|
DETROIT -- A123 Systems is spending money while at the same time warning that it's running out of money. What gives? A buyer, perhaps?
A123 Systems is spending for a future that doesn't exist? Or does it?
The Waltham, Mass.-based battery maker announced last week that it will raise about $39 million through a sale of shares to institutional investors and the release of previously restricted cash as its operating cash is running dry.
Yet, with the deal, it said it will still run out of cash in four to five months and has told the SEC on more than one occasion that odds of its survival are fleeting without a cash infusion.
Last month, Jason Forcier, vice president of A123's automotive solutions group, told me the company was hiring 400 at its two plants in the Detroit area (Livonia and Romulus), bringing total Michigan employment back to peak levels of more than 1,000.
A123 also just launched a new nanophosphate-ion battery and continues to spend money on research and development.
Did I mention the company said it doesn't plan to turn a profit until the second half of 2013?
Maybe, at the very least, someone should check the batteries in the calculator that the A123 execs have been using. Or, maybe the more logical answer is there is a deal coming down the pipeline.
If the company, which said it burned $18 million to $25 million in cash per month, is a sinking ship, then why is it hiring? Why are executives not cutting workers and R&D spending? And, most important, why hasn't BMW or General Motors abandoned deals to receive A123 batteries later this year and next?
Certainly, they've read the news.
In April, a Fisker Karma plug-in hybrid fitted with an A123 battery failed during a test by Consumer Reports. Replacing the defective batteries was expected to cost A123 $66.8 million, including a $15 million inventory charge. The announcement devastated A123's stock price, which hit its lowest mark of 82 cents April 4.
The problem was linked to an incorrect calibration of one automated welding machine in Livonia. The flaw could cause an electrical short, leading to failure of the battery, the company said. The faulty batteries affected five customers.
Later that month, a battery explosion that injured one at GM's Technical Center in Warren was reportedly an A123 battery.
While its stock recovered briefly last month following its nanophosphate announcement, it has continued to drop since -- down about 9 percent.
This means A123's market cap is low ($154.5 million). And a deal is not only possible, but likely.
So what's the deal?
I chatted with Michael Lew, senior analyst, energy creation and energy efficiency, at the New York-based investment firm Needham & Co. LLC this morning, and he agreed -- a deal must be on the horizon.
"Everything they are doing seems counterintuitive without a deal," he said.
A joint venture with a Korean battery maker makes complete sense. Korean battery makers dominate the world market yet have no presence in the U.S. It makes sense for a big player to try to enter this market with infrastructure already in place.
Lew said he could see Samsung being interested, as the conglomerate is reportedly dissolving its joint venture with Germany's Bosch.
A123 execs have also never denied a possible deal. It hired advisers in May to evaluate the company's financing options, which could mean it is evaluating potential buyers. The company would not disclose the name of the advisory firm.
Forcier said the company will take any offers seriously because it has a fiduciary responsibility to its shareholders, but he would not speculate on any possible deals.
It's unclear whether the U.S. government would weigh in on a deal. A123 received a $249.1 million grant from the U.S. Department of Energy in 2009. In April, the DOE extended its deadline until December 2014 to use the funds, which were set to expire at the end of this year.
Either way, A123 has been saying one thing and doing another. Maybe the battery maker has nine lives, but it would still need the EV market to grow at the speed of dog years to stop the bleeding on its own. The market continues to sputter along.
Nissan Motor Co. has sold only 12,000 of its electric Leaf cars in the U.S. since December 2010, The Wall Street Journal reported in May.
Slow sales led GM to shut down Chevrolet Volt production for five weeks during April and May, and the automaker plans a three-week shutdown this summer at the Detroit-Hamtramck plant, which assembles the Volt.
I don't know the fate of A123 or whether a deal is imminent, but I'm betting we find out in less than four or five months.
You can reach Dustin Walsh at email@example.com.