A123 Systems Files for Bankruptcy, JCI to Purchase Assets

A123 Systems Files for Bankruptcy, JCI to Purchase Assets

A123 Systems Files for Bankruptcy, JCI to Purchase Assets

This morning, Johnson Controls, Inc. (NYSE:JCI) announced that it has entered into an asset purchase agreement with A123 Systems, Inc. (NASDAQ:AONE) to acquire its automotive assets. The transaction is valued at $125M. A123 has filed for reorganization under Chapter 11, in order to facilitate the sale of its assets.  Johnson Controls, Inc. (NYSE:JCI) intends to provide $72.5M of DIP financing to support A123 during the sale process. A123 develops and manufactures advanced lithium ion batteries and energy storage systems for transportation, electric grid and commercial applications. Just recently, Wanxiang Group Corp., a Chinese conglomerate, announced a plan to acquire an 80% stake in the troubled battery maker in return for a $450 million investment. However, the deal did not go through.

Johnson Controls will purchase A123 Systems, Inc. (NASDAQ:AONE) auto battery assets for $125 million, following A123 Systems, Inc. (NASDAQ:AONE) filing for bankruptcy under Chapter 11. The auto assets comprise the bulk of A123 value, and sale to JCI follows a failed attempt in August to sell all of A123 to a Chinese investment group for $465 million. The asset sale in bankruptcy will allow renegotiation of existing (uneconomic) contracts and will exclude warranty liabilities surrounding A123.

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Johnson will also gain alternative lithium-ion technology appearing to have incremental value in the “Start-Stop” auto battery market, where Johnson Controls, Inc. (NYSE:JCI) is currently a commanding market leader. The transaction is subject to Court approval and should close in early 2013

Wells Fargo & Company (NYSE:WFC) Analysts think that the transaction makes sense for Johnson Controls, Inc. (NYSE:JCI), as it will broaden the company’s lithium-ion technology offering and enhance its scale. Longer term, the transaction should further solidify JCI’s position in advanced batteries. According to A123’s investor presentation, the company has 22 transportation programs that were sourced for production, or in production, spread across both commercial and light vehicle OEMs.

A123’s automotive business is focused exclusively on prismatic lithium-ion batteries, and has current production contracts with Chevrolet, BMW, and Daimler AG (PINK:DDAIF), as well as Fisker and Smith Electric.  We believe that the purchase may be in part, an accommodation to help these large OEMs (which we would hope would be rewarded with some price relief on current business).  In addition, it positions JCI be the dominant surviving US-based, li-ion battery maker.

Shares of A123 Systems, Inc. (NASDAQ:AONE) are down approximately 75% in today’s session of trading.

Disclosure: No position in any securites mentioned

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