A123 Systems files for bankruptcy, will sell assets to Johnson Controls
By David Shepardson
Detroit News Washington Bureau
31 Comments
Struggling battery maker A123 Systems Inc. filed for bankruptcy protection Tuesday in Delaware and the company said it will sell its auto business to Johnson Controls Inc. in a $125 million deal.
The Waltham, Mass., start-up — which has won $500 million in federal and Michigan funding — said Wisconsin-based Johnson Controls has agreed to acquire much of A123.
The company — founded in 2001 — has lost nearly $900 million since 2007, including $269 million through August of this year, and has never reported a profit. It has 625 employees at its plants in Romulus and Livonia and Ann Arbor office, along with 348 temporary workers in the state.
The bankruptcy filing is the latest setback for the electric vehicle and battery industry, which has received billions of dollars in federal and state support.
The Obama administration awarded $2.4 billion in stimulus grants in August 2009 for advanced batteries and electric vehicles, saying the awards would create thousands of jobs.
But EV sales have been far below what the Obama administration predicted — and many battery suppliers are struggling or have created just a fraction of the promised jobs.
"We believe the asset purchase agreement with Johnson Controls, coupled with a Chapter 11 filing, is in the best interests of A123 and its stakeholders at this time," said A123 CEO David Vieau.
Burning through cash in the face of an expensive recall of batteries from Fisker Automotive— its largest customer — A123 secretly put itself up for sale in March — retaining Lazard Freres & Co. — to find a buyer.
In August, A123 company hired bankruptcy advisers. After getting serious interest from 10 possible buyers, which reviewed confidential presentations, only a Chinese company, Wanxiang Group Corp., made a proposal to keep A123 in business.
In August, A123 announced a deal with Wanxiang, an auto parts company, for an investment of up to $450 million. It would have allowed the Chinese firm to acquire an 80 percent stake in A123.
That deal was never finalized.
Johnson Controls is providing A123 with $72.5 million in financing to operate in bankruptcy.
Johnson Controls plans to acquire A123's automotive business assets, including its customer contracts its facilities in Livonia and Romulus; its cathode powder manufacturing facilities in China, and A123's equity interest in Shanghai Advanced Traction Battery Systems Co., as part of the $125 million deal.
Johnson Controls Power Solutions president Alex Molinaroli said the deal is "consistent with our long-term growth strategies and overall commitment to the development of the advanced battery industry."
Unlike bankrupt solar panel company Solyndra LLC — which received $528 million in government loans — A123 received cash grants from the government, which don't need to be repaid. The U.S. government could seek recovery of some funds used to purchase equipment if the company stopped producing batteries.
Energy Department spokesman Dan Leistikow praised the move by Johnson Controls to acquire A123 — though it must still be approved by the bankruptcy court — and other companies could try to outbid JCI.
"In an emerging industry, it's very common to see some firms consolidate with others as the industry grows and matures," Leistikow said.
Republicans criticized the Obama administration's support for A123.
"The administration needs to answer for this. The taxpayers shouldn't have to subsidize poor investments in failed energy companies. If there is something positive to be taken from this, it's that A123 has decided to sell a major part of its business to Johnson Controls, a U.S. company, rather than Chinese-owned Wanxiang," said Sen. Charles Grassley, R-Iowa. "But the sale to an American company is small comfort, given the hundreds of millions of dollars wasted on this firm."
Michigan Republican Party chairman Bobby Schostak called the news "more broken promises and more job losses." He said there was no "economic balance" to the Obama and Granholm administrations' aggressive support of battery facilities. "They made a big bet on an industry in its infancy," Schostak said, saying they took too big a risk with taxpayer funds.
Republican presidential candidate Mitt Romney has criticized green energy investments and told The Detroit News in June he would end all government loan programs to support green energy.
"A123's bankruptcy is yet another failure for the President's disastrous strategy of gambling away billions of taxpayer dollars on a strategy of government-led growth that simply does not work," said Romney spokeswoman Andrea Saul "While the President has said he would 'double down' in a second term, Governor Romney will return the federal government's focus to its proper role supporting research and creating an environment where private sector innovation can thrive."
A123 didn't explain why the Wanxiang deal collapsed, but Vieau said it was the result of "significant challenges to its completion."
A123 battery key to Chevy's Spark
General Motors North America President Mark Reuss said Tuesday he hopes the changes at A123 Systems won't affect its rollout of the battery-electric Chevrolet Spark, which is due out sometime next year. A123 Systems Inc. has been named as a supplier for the Spark electric.
"We've got a couple different rabbit holes on batteries across the world on our electric vehicles, so I don't think we're in danger there," he said following a keynote address he gave to SAE Convergence in Detroit.
A123 said in a court filing Tuesday that the Chevy Spark EV is "expected to be sold globally in multiple markets starting in 2013."
A123 has won about $500 million in grants and other support from state and federal governments, including $238 million from Michigan and a $249 million Energy Department grant.
The Michigan Strategic Fund Loan is listed as a creditor for a $4 million loan and $3 million for a Massachusetts state loan. The company has failed to meet requirements for adding workers in exchange for the tax incentives.
A123 in April received a two-year extension to spend the rest of the $249 million federal grant. The money was to be used to build facilities in Michigan. Its Livonia plant opened in 2010; its Romulus plant opened last year. The firm has $120 million left of the federal grant.
An Energy Department spokeswoman, Jen Stutsman, said the government hasn't decided whether to award the $120 million in remaining funds for the new buyer.
"The Energy Department's role is to ensure that the grant money is used for its intended purpose — to establish a domestic battery manufacturing industry and support American jobs, Stutsman said. "The disposition of the remaining grant funds will be decided later as we continue to work with the new owners as they determine their plans for the future."
If the government approves the use, it could mean JCI's net cost to buy A123's auto assets is just $5 million.
The company is also benefitting from another Energy Department program funded by the $787 billion 2009 stimulus. A123 was selected as the battery supplier for three projects with a $53.5 million award to companies including DTE Energy Inc., to demonstrate the viability of advanced smart grid technologies.
A123 is still trying to sell its grid, commercial, government and other operations, and has received several indications of interest for these businesses, Vieau said.
In 2010, President Barack Obama invited the CEO of A123 to the Rose Garden to tout the impact of green jobs and he said the company would add more than 3,000 jobs by the end of 2012 — and has about one-third that figure.
"This is what happens when we place our bets on American workers and American businesses," Obama said in 2010.
President George W. Bush inspected an A123 powered EV truck prototype in 2007 on the White House lawn in 2007 and the company would $6 million in grants from the Energy Department during the Bush administration. Many GOP House members supported A123's grant application.
'Substantial doubt' about A123's future
Founded in 2001, A123 has lost about $600 million since 2008 and its stock price has fallen more than 90 percent over its 52-week high amid questions that it would run out of cash.
A123 has faced a series of problems, including layoffs and the recall of some batteries for safety concerns along with a cash crunch.
In the face of struggling electric auto sales, A123 said in May there was "substantial doubt" about the company's viability. The company said Monday it was skipping an interest payment on debt and said it might be forced to file for bankruptcy.
A123 — like General Motors Co. and Chrysler Group LLC in 2009 — is using Section 363 of the bankruptcy code that allows a buyer to acquire the "good assets" of the firm, while leaving behind bad assets like unpaid debts.
In January, a New York-based battery company that won a $118 million federal grant filed for bankruptcy protection.
In January 2011, Vice President Joe Biden toured Ener1 in Greenfield, Ind. The company's wholly owned EnerDel subsidiary won a $118 million Energy Department grant in August 2009 to produce electric batteries for Think models and a Volvo electric vehicle.
To date, the company has spent $55 million of the $118.5 million grant.
In March, a Canadian company — Azure Dynamics — that electrifies Ford Motor Co.'s Transit Connect filed for bankruptcy in the United States.
The company, with offices Oak Park, has been installing the battery electric powertrain in Ford's Transit Connect since 2010.
The company laid off about 120 people worldwide in March, including about 50 in Oak Park.
In 2010, then Michigan Gov. Jennifer Granholm said the battery industry would create 63,000 jobs in Michigan by 2020 and would make the state "the advanced battery capital of North America."
Obama interrupted Granholm during a September 2010 press conference with a phone call to praise the announcement.
"The work you're doing will help power the American economy for years to come," Obama said, thanking Energy Secretary Steven Chu for getting "the money out the door quickly and wisely."
In fact, the Energy Department has withheld $120 million of the A123 funds.
The Energy Department said in a report in February that it estimated more than 175,000 EVs and plug-ins would be produced this year, citing automakers and some unconfirmed media reports. In fact, EV sales in the United States are expected to be under 25,000.
Melissa Burden contributed.
dshepardson@detnews.com
(202) 662-8735
From The Detroit News:
http://www.detroitnews.com/article/20121016/AUTO01/210160393#ixzz29V1hjdgt
