For more than a year, A123 Systems'
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.
The loan guarantee was given based on potential, something the Chinese parts maker still sees, with good reason. A123 has grid projects with AES
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
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.
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