The Detroit News (Washington, D.C.) - Struggling battery maker A123 Systems Inc. — with nearly 800 employees in Michigan — said it reached a deal with a Chinese auto parts company for an investment of up to $450 million that could keep the company in business - and will likely see the Chinese firm acquire a majority stake in the battery maker.
Waltham, Mass.-based A123 reached a deal with Wanxiang Group Corp. that will allow the Chinese firm to acquire an 80 percent stake in A123.
A123 has won about $500 million in grants and other support from state and federal governments - including $238 million from the state of Michigan and a $249 million Energy Department grant as in August 2009 as part of the $800 billion stimulus.
A123 in April received a two-year extension on its deadline to spend the rest of the $249 million grant.
The money was to be used for the construction of new lithium-ion battery manufacturing facilities in Michigan. A123's Livonia plant opened in 2010, and its Romulus plant opened last year. The company has $120 million left of the $249.1 million grant.
In an interview, A123 CEO David Vieau said the company has had preliminary talks with the Energy Department about the Chinese financing, but he said he expected A123 would be able to use the remaining funds "to build factories and create American jobs."
He also said he expected A123 would continue to operate as a standalone company for the time being and pointed to Wanxiang's track record in the U.S.
China has made growing its battery industry a big priority, while support in Congress for additional incentives for battery makers has slowed amid concerns about the strength of the electric vehicle market.
A123 said Wednesday its net loss widened in the second quarter to a larger than expected $82.9 million, up from $55.4 million in the same quarter last year.
Founded in 2001, A123 has lost about $600 million since 2008 and its stock price has fallen 91 percent over its 52-week high amid questions that it would run out of cash. With a market value of $70 million, A123 was recently trading at $0.48 a share, up 2 percent, or $0.01.
A123 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.
Wanxiang is China's largest auto parts company and one of its largest private firms. It is the second largest owner of Guangzhou Automobile, China's most profitable domestic car company, which has joint venture partnerships that include Honda Motor Co, Toyota Motor Corp and Fiat Corp.
Wanxiang's proposed investment in A123 "is intended to create the capital structure necessary for the company to continue growing its core businesses, and alignment with Wanxiang is also expected to substantially strengthen A123's access to the growing vehicle electrification and grid-scale energy storage markets in China," A123 said.
The deal requires the approval of the U.S. and Chinese governments. The financing isn't cheap. A123 will pay 10 percent interest on up to $75 million in initial bridge loans to keep the company afloat.
"Today's announcement is the first step toward solidifying a strategic agreement that we believe would remove the uncertainty regarding A123's financial situation," Vieau said.
The company is a supplier for about 25 electric vehicles and other projects, including for General Motors Co.'s upcoming Spark. Vieau said GM has reaffirmed it decision to keep A123 as a supplier.
A123 said in June it plans to hire 400 in Michigan, a requirement as part of federal and state support. That news came after it laid off workers last year. A123 expects to be at 75 percent capacity for its Livonia plant by the end of the year.
Supporters of the grants to battery firms have worried that Chinese firms would build batteries unless U.S. and state incentives kept battery production in the U.S. "We cannot afford to lose the race to build the clean energy technologies of the future to other countries," said Sen. Debbie Stabenow, D-Lansing.
Wanxiang is already a significant battery producer in China so A123 thinks there are synergies that will help the firms work together. Wanxiang entered a joint venture with Ener1, another U.S. firm that received Energy Department grants, in 2010.
Last year, A123's loss grew 69 percent to $257.7 million from the year earlier. And in April, the company reported a first-quarter loss of $125 million, a 133 percent increase from the $53.6 million loss during the same quarter in 2011.
A123 then said it had "retained an outside adviser to provide financial strategic advisory services in connection with our ongoing strategic efforts and evaluation of strategic alternatives."
A123 also has a research facility in Ann Arbor.
Earlier this year, Fisker Automotive Inc. said A123 would replace about 600 batteries at a cost of $55 million after it said it found manufacturing flaws that led to a recall.
Sens. Charles Grassley, R-Iowa, and John Thune, R-S.D., asked the Energy Department in June if the A123 recall will impact the government's decision to release the remaining portion of grants under the stimulus. "Will DOE consider A123's ongoing financial struggles before distributing the rest of the grant?" the letter asked.
Wanxiang Group and its related companies have more than $13 billion in revenue and more than 45,000 employees across its global businesses in equipment and automotive parts manufacturing, clean energy, financial services, agricultural products, natural resources and real estate, among others. Through its subsidiaries, including Wanxiang America Corporation based in Elgin, Ill, it has more than 3,000 U.S.-based employees.
"A123 offers industry-leading technology for vehicle electrification and grid-scale energy storage, as well as strong manufacturing and systems engineering capabilities in Michigan and Massachusetts. We think this creates important synergies with Wanxiang, which has been involved in this field for 12 years and has strong R&D and manufacturing capabilities in China, especially as we continue to expand on our strategy of investing in the automotive and clean-tech industries in the U.S.," said Weiding Lu, CEO of Wanxiang Group.
Under the proposed terms of the strategic agreement, Wanxiang would provide A123 with up to $75 million in initial debt financing under a senior secured bridge facility, with an initial credit extension of $25 million and $50 million to be funded after the satisfaction of certain closing conditions, and, subsequently, upon satisfaction of certain closing conditions, purchase $200 million aggregate principal amount of A123's Senior Secured Convertible Notes.
Wanxiang may invest up to an additional $175 million if it exercises the warrants that would be issued in connection with its initial investments.
The total amount of shares of A123's common stock issuable upon exercise and conversion of the warrants and notes would represent about 80 percent of the then outstanding common stock of A123.
A123 hopes to close on the financing deal by the end of the year.
