John Petersen's  Instablog

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This morning A123 Systems Inc. (AONE) amended its registration statement to increase the price range for its proposed IPO to $10.00 to $11.50. I take this as an indicator that their IPO road show has been well received and the offering will go to market in a timely manner.

While I've avoided commenting on A123's prospectus, business or financing plans, there is one point that deserves some attention. Their prospectus summary says "According to A.T. Kearney, the global lithium-ion battery market for automotive application in HEVs, PHEVs, and EVs is estimated to be $31.9 million in 2009. A.T. Kearney projects that this market will grow to approximately $21.8 billion by 2015 and $74.1 billion by 2020, based on a moderate drive for change influenced by increasing governmental regulation, emerging powertrain technology, changing consumer demand and OEM product strategies toward more fuel efficient vehicles."

After spending several weeks thinking about that statement, it finally dawned on me that the only way to reconcile A123's market size forecast with its anticipated product cost was with an assumption that lithium-ion batteries would completely displace lead-acid batteries in the automotive market over the next 10 years. With that assumption as a given, a battery cost of $750 per vehicle and a 100 million vehicle per year market would actually work out to about $75 billion in potential battery sales.

While I wish A123 well and hope its offering is very successful, I feel compelled to point out that the lead-acid battery industry is not likely to take such a challenge lying down. As long-term readers know, I believe the new PbC battery that Axion Power International (AXPW.OB) plans to commercialize in cooperation with Exide Technologies (XIDE), together with other emerging lead-carbon battery solutions, are likely to dominate the stop-start and mild hybrid markets because they will offer comparable performance in stop-start and mild hybrids for one third of the cost of lithium-ion. 

In the real world of paychecks and budgets, cost is important and the choice of technology always obeys the laws of economic gravity.

Upgrading from a $150 valve regulated lead-acid battery to a $250 PbC battery is not likely to give rise to substantial resistance from automakers who are actively seeking a more robust and reliable battery technology that will stand up to the demands of stop-start applications. 

Upgrading from a $150 valve regulated lead-acid battery to a $750 lithium ion battery is a different story altogether, particularly when none of the automakers has any history using lithium-ion batteries which have a less than stellar track record under the harsh operating conditions that have made lead-acid batteries the technology of choice for automotive starting, lighting and ignition worldwide.

In a way it's comforting to know that like me, A123 believes that stop-start systems and other mild hybrid technologies will become standard equipment over the next decade. I still think it's far too early to claim victory in a technology race that hasn't been called to the starting gates. Under the circumstances, I think A123 investors might want to take a hard look at the emerging lead-carbon battery technologies and consider hedging their bets.

Disclosure: Author has a large long position in Axion Power International (AXPW.OB) and a small long position in Exide Technologies (XIDE)

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This morning A123 Systems filed another registration statement amendment for its planned IPO. The amendment specifies a preliminary price range of $8.00 to $9.50 and a preliminary offering size of 25 million shares (28.85 million shares with over-allotment option). Amendments like today's filing occur during the late stages of an IPO and it's not unusual to see the price range or offering size increase in later filings.

Both of the preliminary values are about half of what I expected. The price range surprises me because of its rough parity with the $9.20 per share price A123 received in its last private placement. The offering size surprises me because A123 needs to raise significant working capital; needs to raise $250 million in matching funds for the
ARRA battery grants it was awarded last month; and needs to raise up to $60 million in matching funds for DOE guaranteed loans it expects to qualify for. If the A123 IPO goes off in the preliminary ranges, it will have an initial market capitalization of $800 to $950 million.

I have to assume that the initial share price and offering size estimates were fixed at conservative levels because of weak conditions in the IPO market over the last year and uncertain current conditions in the broader market. I sincerely hope that the road show surpasses everyone's expectations. I've been waiting for the A123 IPO since the summer of 2008 and believe that a successful offering will draw attention to the energy storage sector in a way that no other event can.

Storage sector investors who want to better understand the impact a significant IPO can have on a sector should read Zachary Scheidt's recent Seeking Alpha article, The Stage is Set for an IPO Rebound. Another worthwhile recent article from Forbes.com
that discusses the potential impact of the A123 IPO on the energy storage sector is "Battery IPO Could Recharge New Issue Market.

August was a month of surprises for my cheap vs cool comparisons. At the beginning of August I assumed that the announcement of the ARRA battery grants would give a big boost to the cool groups who were clearly going to walk away with the lion's share of the funds. Apparently the market had done a pretty good job of handicapping the results so the surprising upside performance came when Exide and Axion, a pair of lead-acid dark horses were included in the list of grant recipients. The July 31 to August 31 comparison table follows.

		31-Jul	31-Aug	Percent	Market
Cool Emerging	Symbol	Close	Close	Change	Cap
Ener1	HEV	$6.38	$6.38	0.00%	$745.34
Valence Technology	VLNC	$1.83	$1.50	-18.03%	$190.36
Altair Nano	ALTI	$0.97	$0.91	-6.03%	$96.18
Beacon Power	BCON	$0.76	$0.72	-5.25%	$86.94
Cool Sustainable
Maxwell Tech	MXWL	$14.16	$13.53	-4.45%	$351.40
Advanced Battery	ABAT	$4.28	$4.03	-5.84%	$249.39
Ultralife	ULBI	$6.42	$6.03	-6.07%	$102.38
China BAK	CBAK	$3.31	$2.84	-14.20%	$163.84
Hong Kong	HPJ	$1.41	$1.50	6.38%	$20.34
Cheap Emerging
Axion Power	AXPW.OB	$1.25	$2.36	88.80%	$84.51
ZBB Energy	ZBB	$1.30	$1.35	3.85%	$16.75
Cheap Sustainable
Enersys	ENS	$19.79	$19.89	0.51%	$956.11
Exide Technologies	XIDE	$4.87	$7.11	46.00%	$536.95
C&D Technologies	CHP	$2.00	$2.00	0.00%	$52.59
Active Power	ACPW	$0.74	$0.73	-0.68%	$48.51

For the month, a $1,000 investment in each of the identified companies would have resulted in a 7.3% loss for Cool Emerging, a 4.8% loss for Cool Sustainable, a 46.3% gain for Cheap Emerging and an 11.5% gain for Cheap Sustainable. A $1,000 investment in each of the Dow, the S&P 500 and the Nasdaq would have resulted in a 2.8% gain for the month.

My new crystal ball tells me that September is likely to be a fascinating month. I'm still expecting the A123 Systems IPO before mid-month and think that a deal in the half-billion dollar range will have a lot of money managers taking a serious look at storage for the first time. If the general response is anything like the reactions I've gotten in recent meetings with some European money managers, the companies with objectively low valuation metrics should perform very well. There is still a huge gap between the cool sustainable companies that trade at a multiple of sales and the cheap sustainable companies that trade at a fraction of sales. Similar discrepancies can be found in the emerging company groups.