A123 Systems, Wanxiang Wins - What's Next?

| About: A123 Systems, (AONEQ)

Bidding for the assets of A123 Systems, Inc (AONE) concluded Saturday with Wanxiang Group of China emerging as the victor. After filing for bankruptcy in October, A123 has been the target of many bidders looking to capture their lucrative assets. Suitors included Siemens AG of Germany, and a joint-bid effort by US based Johnson Controls Inc. and NEC Corp of Japan. Wanxiang reportedly paid $260 million for the company's non-defense assets. With liabilities listed at $376 million when they filed bankruptcy, this leaves $116 million hanging in the balance. Navitas Systems reportedly paid $2.25 million for the defense business so there appears to be no residual value for stockholders after creditors are paid.

There will be a hearing in Delaware Bankruptcy Court on Tuesday. This is where all of the accepted bids full value should be presented. Wanxiang's and Navitas' offers total $262.25 million. Wanxiang's portion should be less the $50 million Debtor in Possession (DIP) loan that it provided to A123.

Wanxiang inherits a wide customer base. As you can see from the list below, they have a very large foundation of business on which to thrive.

Current & Potential Customers

  1. Fisker Automotive - Karma
  2. Better Place - Japanese Taxis
  3. Shanghai Automotive Industry Corporation - Roewe -750 Hybrid
  4. General Motors - Chevrolet Spark EV
  5. Navistar International - EStar
  6. Daimler Buses North America - Orion VII
  7. Eaton - Plug-in Hybrid Trouble Truck
  8. Smith Electric Vehicles - Newton
  9. BMW - ActiveHybrid 3 and 5

A123 is a Tier I supplier to many automakers and in some cases their exclusive provider. Fisker is the most vocal and seems to be one of the most vulnerable customers. Having had to stop production on their Karma, Fisker's fate could very well hang in the balance of the bankruptcy's courts acceptance of the sale price. As noted in my previous article A123 Systems Assets Attracting Much Attention Fisker requested a delay in court proceedings to allow for other interested parties to participate in the bidding of assets to ensure that more of A123's value could be realized. They wanted to make sure that A123 is able to fill their battery orders and not cancel their contract which could be allowed by the bankruptcy judge.

Another of Fisker concerns was the government's objections to a foreign company gaining access to US technology and the grant money allocated to A123 by the Department of Energy which could total $250 million. Only part of the money has been issued but A123 could still collect the remaining balance after the bankruptcy is concluded. Members of Congress have postured that a foreign company should not have access to US developed technology and grant money. The political wrangling is to be expected especially in light of the recent election, but what is important to understand is that the decision still resides with the Committee on Foreign Investment in the US. With Navitas receiving the defense related assets, the deal will be evaluated and any concerns will most likely put to rest.

Even so, a foreign company purchasing a company that has received US government money under the American Recovery and Reinvestment Act of 2009 would not have been unheard of. Ener1 was purchased by Russian investor Boris Zingarevich. Wanxiang was probably not intimidated given that they were Ener1's biggest investor behind Zingarevich. The recent decline in the stock price has most likely been a result of the political posturing in the negotiations for the political parties to resolve the looming "fiscal cliff".

There are many that wanted A123's defense business. Although some are foreign, they are allies and may have been excluded from many of the political concerns. If you are unfamiliar with foreign entities owning US technology look up the Abrams M1 Tank, which is operated by Australia, Egypt, Kuwait, Saudi Arabia and even Iraq. Much of the dispute has been associated with Wanxiang as it is a Chinese company.

Wanxiang had offered $465 million for A123 earlier this year which leaves a difference of $205 million. A123 may have factored out the remaining value of the government loans which are around $120 million. This could bring that difference down to $85 million. With Navitas' $2.25 million offer, that would see the company selling at a discount of $82.75 Million or 17.8% on the enterprise value.

How A123 will be structured after the bankruptcy remains to be seen. Wanxiang has vowed to keep most of the US assets intact. For a company that had its IPO price at $13.50 per share, Friday's close at $.069 has been a disappointing ride for many of its investors. Friday's volume of 5.1M was low compared to the average volume of 25.8M as reported by Yahoo Finance at the close. I suspect that the low volume was due to investors waiting for any shred of news before adjusting their positions. The next few days will be very interesting as Judge Kevin Carey, the Presiding Judge for the US Bankruptcy Court, finalizes the outcome of the case and lays out all of the final terms for A123's assets.

Disclosure: I am long AONE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: AONE now trades under the symbol AONEQ.

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