Game over for Atari US

March 2013 | DEALFRONT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

After satisfying the national security concerns of the Committee on Foreign Investment in the United States (CFIUS), Wanxiang America Corp, the US subsidiary of the Wanxiang Group, won approval for its $257m acquisition of insolvent US firm A123 Systems Inc in late January. The CFIUS approval finally completes Wanxiang’s purchase of the civil business of A123, which produces lithium-ion batteries for cars, and power grids in the US and China.

A123 collapsed into bankruptcy in October 2012 following a weaker than expected demand for hybrid vehicles. Wanxiang also saw an initial deal for A123 collapse after the Chinese company ran afoul of CFIUS. Wanxiang had originally attempted to acquire a stake of up to 80 percent in A123 for an investment of up to $450m.

According to a report from the Wall Street Journal, Wanxiang had even considered taking the unusual step of establishing an independent trust to purchase the civilian arm of A123’s business in order to placate CFIUS. Eventually, this was deemed unnecessary as Wanxiang won the approval it desired.

However, the sale has not been without its controversies. In August 2009, A123 was awarded a grant of $249m from the US Department of Energy’s (DOE) Electric Drive Vehicle Battery and Component Manufacturing Initiative in order to build new factories and keep the business in the US.

Despite the grant, A123 filed for Chapter 11 bankruptcy protection in October and, according to the paperwork filed, the firm reported assets of $459.8m and debts of $376m. A123 received only $132m of the announced stimulus package. Wanxiang will not receive the remainder of the grant.

Wanxiang originally won the approval of the US bankruptcy court on 11 December 2012. The company beat out competition from Johnson Controls Inc and NEC Corp to win the auction for A123.

The completion of the sale, though, was held up while CFIUS, led by the Treasury Department, reviewed the transaction. A number of congressmen voiced concerns over allowing a foreign competitor to acquire technologies developed with government funding.

Wanxiang opted to not pursue the government and military side of the business, and this unit has been sold to US company Navitas for $2.25m. Yet critics of the deal have stated that because the same technology could have different applications, it is nigh on impossible to draw a genuine distinction between the civil and military businesses. During the sale process, Marsha Blackburn, the Representative for Tennessee, who serves as vice chair of the House Energy and Commerce Committee said “[T]his is a clear cut example of a time when President Obama needs to step in and protect our national security interests”.

The eventual acquiescence of the committee provoked protestations from politicians and lobby groups alike. Senators John Thune and Chuck Grassley issued a joint statement outlining their issues with the sale. “Technology produced by A123 and funded by US taxpayers should not simply be shipped off to China so that the military applications for these materials can be reproduced abroad,” stated Senator Thune, a Republican from South Dakota.

Wanxiang America is optimistic about the company’s future. Company president Pin Ni said “We’re pleased the government has completed its review and provided us with the go-ahead to finalise this transaction. The future is bright for A123. It is a company with exceptional talent and potential, and Wanxiang America is committed to its long-term success and the continuance of its US operations”.

Although Wanxiang has not revealed the concessions it was required to make in order to appease CFIUS, the company’s strong background of investing in US industries may have contributed to it winning the committee’s approval. The company generates roughly $1bn in US revenue a year by providing parts to GM and the Ford Motor Co. Wanxiang has also purchased or invested in approximately 20 US companies, many of which have been near to bankruptcy. Wanxiang currently employs around 6000 people in the US, the majority of which are located within the automotive industry.

A123 Systems LLC has been formed as a subsidiary of Wanxiang America Corp as a result of the acquisition. The firm will continue to operate out of its factories in Michigan, Massachusetts and Missouri, as well as its facilities in China. Mr Ni added “We are excited to add A123 Systems to our growing portfolio of companies as we continue to expand on our strategy of investing in the automotive and clean tech industries in the US. A123 will continue to offer cutting-edge technology for vehicle electrification and grid-scale energy storage, strong manufacturing and systems engineering capabilities and a world-class R&D team.”

Richard Summerfield