Did U.S. Taxpayers Boost Bailout of British EV Investors?
NLPC readers by now have learned there is more than meets the media’s eye when it comes to the Obama administration’s “Green” initiatives, and specifically, the government-subsidized electric vehicle program. Particularly egregious might be how American taxpayers have helped save a troubled EV company in the United Kingdom for its burdened investors.
Under the surface in this case is Kansas City-based Smith Electric Vehicles Corp., a company that did not exist in its U.S. form until January 2009. The company does not make passenger vehicles, but commercial trucks. Once Smith-U.S. established itself in Missouri, somehow that was enough of a track record for the Department of Energy to award the company $10 million in August 2009, and an additional $22 million in March 2010, for an ET (electric truck) demonstration program.
The founders of Smith-U.S. did not come from the automobile or electricity businesses, or anything even close. CEO Bryan Hansel and Chief Technology Officer Robin Mackie (an engineer who cites no specific automotive experience in his bio) both emerged from Evo Medical Solutions, an international manufacturer of home respiratory devices. Smith executives claim industry credibility by citing “more than 80 years of experience in selling and servicing electric vehicles in the United Kingdom.” The British business that Smith-U.S. claims to be spun from existed as a division by the same name, under a company called The Tanfield Group.
The management of Smith-UK was not impressive. The company’s financial picture began to tumble in 2008, after previous fawning over its “Green” electric delivery trucks and praise from authorities such as former Prime Minister Tony Blair, who once called Tanfield “UK manufacturing innovation at its best.” But by April experienced investors grew concerned, with one commenting to the London Telegraph, “There seemed to be no major reason for the shares to sink, as the company’s figures were still good, but suddenly over a few days the price dropped dramatically.”
Later the same month investors wondered if Tanfield was “more hype than reality,” the newspaper reported. Shares had dropped 20 percent in one week, following the release of Tanfield’s annual results. Analysts were troubled by claims that its Smith vehicles were ordered by major customers, but couldn’t be verified.
“Given the growing political importance of ‘green issues,’ ordering a zero-emissions vehicle is the sort of thing that (customer) companies would want to sing from the rooftops,” said one cynical analyst.
By July 2008 Tanfield’s stock price had “collapsed” (scroll down at link) and was harming other holdings of its founder, Roy Stanley, and his ability to raise funds for his other business ventures. Tanfield is traded on London’s Alternative Investment Market, which Telegraph business journalist Ben Bland has called a “circus” with “far too many clowns.” Of Tanfield – and other puffed-up companies like it – he wrote, “The crazed band of retail investors who follow these shares get drunk on greed and optimism in the good times, buying up stock on the back of wild bulletin board rumours or the vague hope that there is ‘good news in the offing.’” That “froth” evaporates quickly in difficult economic times, Bland wrote.
“The success stories can be staggering but the wipeouts are all too common,” Bland wrote about AIM in an August 2008 column. “Often described as a ‘stock-pickers market,’ AIM could equally well be described as a losers’ market.”
That proved to be the case for Tanfield’s investors (except Stanley, who cashed out 8.5 million shares the previous summer). According to reports in The Telegraph, the London Stock Exchange investigated the company in July 2008 after a “major profits warning” led to the loss of 80 percent of its stock price in less than a day. In the course of one year, the company had lost more than 97 percent of its value, and the hit reverberated to Smith Electric’s suppliers. Investors demanded a shake-up of the management team.
“The company, which has been criticized by analysts for poor standards of disclosure and weak financial controls…confirmed investors' worst fears, admitting it would fall short of market expectations because ‘a marked slowing in our markets was experienced throughout June,’” The Telegraph reported at the time. “Tanfield also revealed it had spent far more of its cash reserves than analysts were expecting, as it was hit by delayed customer payments and supply chain problems.”
Meanwhile the independent Smith Electric Vehicles in the U.S. was launched at the beginning of 2009, and was identified by Tanfield/Smith-UK – which was floundering under heavy losses – as its “associate company.” Almost immediately upon incorporation SEV-US’s Bryan Hansel informed the Securities and Exchange Commission of his intent to sell $15 million of debt or equity investment in the company.
In August 2009 the Obama administration announced a $10 million award to Smith-US – less than eight months old – as part of $45 million in grants for the manufacture and distribution of electric vehicles and advanced batteries, which came out of the $2.4 billion in Recovery Act funding. Commerce Secretary Gary Locke announced the grant at a press conference in Kansas City, where he claimed “they were selected through a highly competitive process by the Department of Energy.”
“After too many years of economic growth fueled by speculation and short-term thinking, these types of investments will help America recapture the spirit of innovation that has always moved us forward,” Locke said.
Hard to imagine a more speculative investment than an eight-figure one in a gestational business whose technology – electric vehicles – hasn’t been proven in passenger cars, never mind commercial trucks. But could that commitment by the Department of Energy to Smith-U.S. have built its credibility enough to draw more investors? By October 2009 Hansel told the SEC he had raised $7.4 million of the planned $15 million. A month later he had sold another $3.7 million investment in the company – but had no revenues to report yet.
And in April 2010 Smith-U.S. had raised the $15 million it had sought – on top of another $22 million grant from the Department of Energy – so what did it do? The company agreed to buy Smith-UK. Tanfield Founder Roy Stanley, and CEO Darren Kell, were added to the board of directors for Smith-U.S. But by late summer the deal had still not been consummated and the British company’s share price again tanked. Liberty, a rival British EV manufacturer, made overtures to Tanfield investors for a buyout, but were rebuffed.
Finally by the end of 2010 the sale was complete, for $15 million in cash, payable in 20 equal installments, plus other financing and ownership considerations. In its annual report Tanfield stated it now owned 32.2 percent of Smith-U.S., while Smith-U.K. was now formally a “discontinued operation.” But Tanfield’s woes may not be over, as the U.K. Accountancy and Actuarial Discipline Board announced a year ago it would investigate the conduct of its accountants in their preparation of the company’s 2007 and 2008 financial statements. Apparently the investigation is still ongoing.
Now Tanfield has a new lease on life in the U.S., with its stake in Smith Electric-U.S. and $32 million in taxpayer funding, plus the private money it has raised. And one month ago Smith-U.S. announced plans for an initial public offering of its common stock. It proposed the sale of $125 million in stock, and said it sold 320 vehicles during the previous 12 months. According to the Kansas City Business Journal, Smith Electric said “it has ‘written indications of interest’ for 2,220 vehicles for delivery from 2012 through 2015.” The company lost almost $30.3 million last year, and lost $21.3 million for the first half of 2011. Based on the combined statements of Smith UK and Smith U.S., the companies together lost $17.5 million in 2009.
With that history of success, and after Secretary Locke boosted prospects with a visit (and $10 million) to Kansas City in 2009, President Obama showed up at Smith-U.S. in July of last year to promote his economic policies.
“Because of the grant that went to this company,” the president said, “we can hear the sounds of machines humming and people doing their work, instead of the ghostly silence of an emptied-out building and the memory of workers who were laid off a long time ago.”
And if you listen closely, you can also hear the cheers of once downcast British investors, who are now elated by the rescue of their company by American taxpayers and other various dupes.
Paul Chesser is an associate fellow for the National Legal and Policy Center.