A123 Systems, the maker of advanced battery systems predominantly used in electric cars, secured a much-needed financing deal Wednesday.
Also Wednesday, the company reported a net loss for the second quarter of $82.9 million. It had warned in July that it would run out of cash for running its operations, according to a Reuters report.
Shares in the company had dropped from $5 last September to around $0.50 this week as investors feared the possibility of bankruptcy. A123 had previously received a $249 million grant from the U.S. Energy Department under the Obama administration’s Electric Drive Battery and Component Manufacturing Initiative.
Given this gloomy background, management and investors were relieved to see the announcement of a memorandum of understanding (MOU) with Wanxiang Group, which will see the Chinese maker of auto components invest up to a total of $450 million in A123. The largest private company in China, Wanxiang has revenues of over $13 billion and 45,000 employees worldwide.
“Today’s announcement is the first step toward solidifying a strategic agreement that we believe would remove the uncertainty regarding A123’s financial situation,” said David Vieau, CEO of A123 in the press release. “A substantial capital investment from Wanxiang would not only provide financial stability to A123 as we continue to grow, but it would also align us with a large, successful global brand in the automotive and cleantech industries.”
Weiding Lu, CEO of Wanxiang Group was also optimistic: “This MOU is the first step toward a longer-term agreement through which we plan to build on the foundation A123 has established in the U.S. and help expand the company’s capabilities both domestically and internationally.”
Cautious Share Reaction As Investors Fear Dilution
A123 systems shares finished the day up 6.4 percent, an insignificant increase compared to the nature of the deal. This most likely has to do with the structure of the investment, which will see Wanxiang provide an immediate loan of $25 million that will then be followed up by another loan of $50 million upon the closure of the deal.
The main investment, however, will come in the form of $200 million in convertible bonds that will be converted to common stock once the deal is cleared by all relevant regulatory and corporate bodies.
Despite the fact that other convertible notes worth $140 million at the end of 2011 will be retired in the process, there is still a significant dilution effect—earnings per share of existing shareholders will be reduced as new shares are issued in the conversion process—given the company’s small market capitalization of only $73 million. An extra $175 million can then be invested through warrants, which will further dilute existing holders.
Execution Risk Looms
In addition, A123 will only receive the amounts past the $25 million initial bridge financing if the Committee on Foreign Investment in the United States (CFIUS) clears the transaction.
Subsequent tranches of the investment are dependent on approval by the committee, which is a part of the United States Treasury and has to “determine the effect of such transactions on the national security of the United States,” which is stated on the department’s website. Once A123 and Wanxiang agree to final terms, they can approach CFIUS, which will then start a 30-day review. A decision can be made during that period, but it is possible that the committee will launch a 45-day investigation, which in an extreme case can be escalated to the president of the United States.
In past transactions, Lenovo’s bid for IBM’s computer business was cleared within the 30-day period in 2005, but another potential high-profile merger did not go through the same year. The bid of state-owned Chinese oil giant CNOOC for Unocal—a California based oil exploration company that later was acquired by Chevron—was not explicitly blocked by the CFIUS, but nonetheless was not successful. According to the law firm Wilmerhale, the board of Unocal rejected the higher CNOOC bid in favor of the Chevron bid because there were concerns about a CFIUS refusal.
A representative of the committee could not be reached for comment Wednesday.
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