A123 Systems' Lifeline Comes With Scrutiny

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For more than a year, A123 Systems' (Nasdaq: AONE  ) future has been in serious doubt as its financial performance waned. The company may have gotten a ray of hope this week from a company looking to invest $450 million in A123, but it comes at a political price.

Wanxiang Group, a Chinese auto parts manufacturer, has agreed to the framework of a $450 million investment in the battery maker, a much-needed lifeline. The deal would include $75 million in debt financing, $200 million in secured convertible notes, and warrants that would result in an additional $175 million investment if exercised. The exercise of these warrants would result in about an 80% ownership stake in the company, which is where the political debate comes in.

A123 was one of the high-profile recipients of a $249.1 million federal matching grant and millions of dollars in subsidies from the state of Michigan as well.

Dire straits
The loan guarantee was given based on potential, something the Chinese parts maker still sees, with good reason. A123 has grid projects with AES (NYSE: AES  ) , Vestas, and Southern California Edison already deployed, creating backup storage for the grid. One of AES' projects even got a DOE loan guarantee. Commercial companies like Dell, Procter & Gamble, and Hewlett-Packard have projects in various stages of development with A123. And in automotive, the company's most-discussed business, A123 is already in production for Fisker, Smith Electric, and BMW, along with having GM's (NYSE: GM  ) Chevy Spark in development.

The company's potential has never been in question, and management hopes its Nanophosphate EXT battery will strengthen its technology lead. What has been in question is the company's finances and the market's adoption of EVs.

So far, the market hasn't bought EVs at the rate investors had originally hoped, with GM and Nissan posting anemic sales numbers. Tesla Motors (Nasdaq: TSLA  ) is the only one having success right now, although Ford's (NYSE: F  ) Focus Electric has promise and is being launched nationwide by the end of this year. Unless sales pick up, it's bad news for everyone.

In the second quarter, sales fell 50% from a year ago to $17.0 million and sales year to date have fallen from $54.5 million in 2011 to $27.9 million this year. That's headed quickly in the wrong direction, despite the high-profile partners, and A123 doesn't even have enough cash to survive another quarter with its current operating cash burn, hence the need for a big investor.

Foolish bottom line
It may be unpopular to have a Chinese company invest in an American manufacturer that received government funding, but the alternative is almost certainly bankruptcy in a matter of weeks (unless another investor pops up). A123's finances are that bad.

This may be the last hope the company has to survive the next few months and still doesn't guarantee its success long-term. It's so dilutive that I don't think it's a good deal for current investors, but they may not get a choice in the matter. The investment offer has already become a game of political football and its closing is uncertain.

The bottom line is that for anybody to win in the battery business, demand needs to pick up. I don't see that happening at a fast enough pace to save A123 or Valence Technologies, and we've already seen Ener1 go under.

One of the more exciting EVs to hit the market and that may have success is Ford's Focus Electric. Check out what one of our analysts thinks about the company's latest moves and the stock in our new report on Ford. It comes with a year of free updates when big events take place and can only be found here.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Ford Motor and Tesla Motors. Motley Fool newsletter services have recommended buying shares of General Motors, Tesla Motors, Ford Motor, and Procter & Gamble. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 13, 2012, at 8:32 AM, nonqual wrote:

    <<Tesla Motors (Nasdaq: TSLA ) is the only one having success right now >>????

    Since inception Tesla has lost $865 million and never had a profitable quarter. Tesla has sold less than 2,400 vehicles in the last four years. They claim to have reservations for 12,000 of the Model S, but it's taken three and a half years to accumulate that many, and the projected gross margin assumes they will sell 20,000/ year.

    Tesla just reduced it's third quarter production target in half to 500 and is rapidly burning through remaining cash. They need to put another $30 million in a cash reserve account by October 2 or be in default of the DOE "loan".

    Tesla success has yet to be demonstrated. If production problems persist or reservation don't pick up soon, it could go into a death spiral, with reservation holders asking for refunds further exacerbating cash shortages.

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