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A123 - the saga continues

Thu, 01/17/2013 - 17:36 -- Ruth Williams

After filing for bankruptcy in October 2012 a number of bidders expressed an interest in the assets of the company, including Chinese automotive company Wanxiang Corporation and US battery maker Johnson Controls Incorporated.

Problems arose almost immediately because A123 had received grant money totalling $249.1 million under the American Reinvestment and Recovery Act to bolster the production of batteries for electric vehicles.

Objections were raised by US lawmakers over taxpayer money funding a company that could come under Chinese ownership.

Even before filing for bankruptcy Wanxiang had shown an interest in buying A123 back in September and thus ‘rescuing’ the firm and allowing it to continue. Operation.

But  terms were not agreed in time to stop A123 having to file for Chapter 11 bankruptcy in October.

However an offer was accepted by JCI to supply debtor in possession (DIP) financing to the total of US$75.2million, which kept the firm afloat.

Then A123 petitioned the bankruptcy court to approve a DIP financing offer from Wanxaing instead. This $50 million deal, which would repay money already borrowed from JCI, was approved on November 26th.

Wanxiang Corporation and Johnson Controls both bid for the assets of the company, Wanxiang put in the highest bid for the automotive, electric grid and commercial assets. Its bid of $256.6 million dollars was US$5 million over JCI’s final bid.

JCI chose to withdraw from the bidding at the end of December stating the bid from the Chinese company was greater than the value of the assets would be to JCI.

The bankruptcy court approved Wanxiang’s bid, pending approval from the US Committee of Foreign Investment (CFIUS). Approval will be judged by way of a review of how national security could be affected by the foreign purchase.  And it is the national security issue which is threatening to wreck the deal. It is not known how long this process may take.

The Strategic Materials Advisory Council, a coalition of former US Government leaders and industry experts, has argued the technology developed by A123 should not be passed into the hands of a foreign company because losing it will damage America’s position as a player in energy storage technology markets.

One stakeholder opposing the sale is JCI. The CFIUS heard that JCI has been actively lobbying against the sale.

The terms of the court procedure stipulated Wanxiang was obliged to pay JCI around US$5million as a break-up fee and expense reimbursement this has been challenged on the grounds that JCI has been attempting to block the sale to the Chinese company.

This amounts to JCI being paid $5 million in break-up fees after actively trying to quash the very deal it would receive the fee from.

The judge ruling on the bankruptcy case said he was “troubled by the suggestion that somebody who participated in the auction may in fact already be working against the parties being able to satisfy a condition of the sale.”

The bid made by Johnson Controls was solely for the auto-parts assets of A123 and its bid was combined with NEC for the business.  Wanxiang sought to acquire the whole business and placed a bid respective of this. It is no wonder the higher bid for the larger part of the company was accepted by the court in the interest of the debtors.

The terms proposed by the creditors, due to the uncertainty of CFIUS approval suggest a trust being set up into which the sale could close. The proceeds of the sale would go to the creditors and the trust would take on temporary ownership of the assets pending CFIUS approval. If approval were obtained, the trust would dissolve and assets would be released to Wanxiang but if it were not approved, the trust would dispose of the assets for the benefit of Wanxiang.

Advisors hope to close the deal around the middle of January but with convoluted terms such as these it seems unlikely to be concluded anytime soon.