Why the A123 deal with JCI raises more questions than answers

Dustin Walsh covers auto suppliers for Crain's Detroit Business, an affiliate of Automotive News.

Today's announcement that A123 Systems Inc. would seek Chapter 11 bankruptcy protection and agree to sell its automotive business to Johnson Controls Inc. currently leaves more questions than answers.

Under the deal, Milwaukee-based JCI would acquire A123's automotive business, which includes two plants in suburban Detroit, for $125 million.

A123 CEO David Vieau said in a statement the purchase agreement and Chapter 11 are in the best interest of its shareholders.

But at $125 million, the deal is far below what A123 was offered by China supplier Wanxiang Group Corp. -- which signed an agreement in August for an 80 percent stake in A123 for $465 million.

The deal simply does not make sense for shareholders, including Heights Capital Management, IHI Corp. and General Electric Co.

GE provided A123 $70 million in total investments in 2009 for a then-10 percent stake in the company. GE now holds 7.37 million shares or 4.32 percent -- which is now worth about $443,000 at current stock prices.

Unless… Enter the U.S. Department of Energy.

The DOE awarded A123 a $249 million grant in 2009 under a program to expand U.S. automotive battery manufacturing. As of August, A123 had tapped nearly $130 million of the funds.

With a company in shambles -- since its creation, A123 has reported 14 straight quarterly losses totaling $857 million -- and in the final leg of a contentious presidential election, the U.S. government was not about to approve Wanxiang's ownership stake.

A123's Vieau told me when the deal was announced that he expected a "thorough look" from the U.S. government but expected the deal to go through quickly.

That didn't happen. And Vieau acknowledged that today, saying in a release, "We determined not to move forward with the previously announced Wanxiang agreement as a result of unanticipated and significant challenges to its completion."

The DOE's grant programs have been a source of contention for years, peaking with the September 2011 bankruptcy filing of solar-panel maker Solyndra LLC two years after it received a $535 million loan guarantee from the department.

There's no doubt the Romney campaign is prepping the governor in advance of tonight's debate. Presidential candidate Mitt Romney said in previous media interviews that the Obama administration picked losers for DOE loans and grants.

A123 was running out of money and couldn't wait for the government's approval, as it was set to default on a bond payment today.

Despite contracts with General Motors Co., BMW and others, A123 couldn't offset upstart costs as the electric-vehicle market lags.

President Barack Obama has stated a goal of 1 million EVs in the U.S. by 2015. Since 2011, EV sales have totaled fewer than 50,000 through September, Bloomberg reported.

Aleksandra Miziolek, a partner and director of Detroit-based Dykema Gossett LLP's automotive practice, said the A123 deal is one of many to come as the alternative-energy market continues to struggle.

"We will be seeing more and more distressed technology companies seeking shelter with both automakers and suppliers as the business model for alternative-fuel startups even with government assistance is just not workable yet," she wrote in an email.

JCI -- which opened a lithium-ion plant in Holland, Mich., last year with $300 million of DOE funding -- would get a good deal on the assets, including A123's Chinese operations. But does the end justify the means?

Mike Wall, director of automotive analysis for IHS Automotive Inc., said the move solidifies JCI's position as a leader in automotive batteries. JCI holds a large market share of lead acid batteries, supplying to automakers and aftermarket brands such as DieHard, Duralast and AC Delco.

But if the courts approve the deal, JCI will own three U.S. lithium-ion plants with more than 500,000 square feet of floor space in an underwhelming market.

JCI's Holland plant continues to produce lithium-ion battery assemblies, but the plant is nowhere near full capacity. Neither is A123.

The big question is whether JCI will drain A123 of its patented technology and ditch the Detroit area plants -- and 700 workers -- and move them to Holland.

Like the lithium-ion battery market, the future of these plants is not certain.

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