NASDAQ Delisting Threat Jeopardizes Chinese Rescue of A123 Systems

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A123 logoTwo weeks ago the mainstream and clean tech advocacy media proclaimed that taxpayer-subsidized, failing electric vehicle battery maker A123 Systems would be saved by a deal with a Chinese company.

Since then the Massachusetts-based manufacturer’s stock price sank below what had been its previous low of 44 cents. This morning it is down to 38 cents, and yesterday the company received a delisting notice from the NASDAQ. So what happened?

There could be several reasons why the recipient of hundreds of millions of U.S. stimulus dollars hasn’t impressed Wall Street with its pending bailout from Wanxiang Group. The deal is not binding, so obviously either party could back out.

One possible reason it may fail is that the U.S. and Chinese governments must approve it, which are uncertainties. China will probably embrace it, which will be discussed momentarily. But the fact that so much U.S. government money has been poured into A123, only to see the company possibly become the property of a Communist competitor, may not bother the Obama administration much but a lot of Congress members will certainly scrutinize the plan.

Last week Republican Sens. John Thune of South Dakota and Charles Grassley of Iowa had some tough questions for Energy Secretary Steven Chu about A123.

“Billions of U.S. taxpayer dollars have flowed to foreign companies through the Recovery Act,” the two senators wrote in a letter dated August 14, “and we are concerned that the recent announcement could lead to even more taxpayer dollars going overseas.”

Which is one reason China will love it, but even more so, they desire the technology transfer. Wanxiang could end up with as much as 80 percent ownership of the company based upon the terms of the deal, which are revealing.

According to a report by John Petersen at AltEnergyStocks.com, after his careful scrutiny of the SEC filing about the deal, receipt of an initial $75 million is contingent on A123 retaining its R&D and engineering teams, in addition to U.S. and Chinese government approvals. Of that, the first $25 million constitutes a “bridge loan” that is payable with few hurdles needed to clear, but neither is that nearly enough to solve A123’s liquidity problems. 

After that, things get complicated, according to Petersen. Another $200 million in convertible note financing from Wanxiang is contingent upon several factors, including certain conditions related to previously issued notes, “assurances that A123's government grants and tax credits will remain available,” increasing the number of directors from seven to nine with Wanxiang choosing four members, and (drum roll please) continued listing of A123’s stock on NASDAQ.

Those factors, obviously, are big “ifs.” Besides the senators’ concerns, Michael Wessel, a member of the bipartisan U.S.-China Economic and Security Review Commission, told Reuters two weeks ago, “This is a very troubling transaction that should be strictly scrutinized by the U.S. government. This is a critical sector and one that American policy makers have focused on in terms of future economic opportunity and job creation.”

For China, the attraction appears to be mostly about the technology, as indicated by Wanxiang’s desire to make sure A123’s R&D/engineering is retained. Without that, in all likelihood, the company otherwise does not hold much appeal. Whatever its assets are, they are tied up in the smaller (by comparison) bridge loan, and media reports state that only roughly $120 million-$130 million are still payable from a $249 million U.S. Recovery Act grant to A123. Those aspects certainly are important in terms of keeping the company viable, and thus less costly for Wanxiang, but they certainly want their hands on the intellectual property. 

Which is the ultimate insult for U.S. taxpayers. The Obama administration sold the president’s “green” stimulus program to Americans upon the premise the “investment” would produce clean energy jobs and technological advancement in the U.S. That is one of the many concerns on the minds of Grassley and Thune. 

“What assurances, if any, does DOE have that the A123-Wanxiang transaction and additional DOE funding through the Recovery Act will not lead to a transfer of taxpayer-funded intellectual property to a China-based company, or that the taxpayer funded manufacturing jobs will remain in the United States?” the senators asked in their letter to Secretary Chu.

At this point most Americans (those who are paying attention, anyway) would be happy to see A123 go – anywhere else – if the money from taxpayers was returned. The company has committed repeated blunders with battery recalls and explosions, an investor class action lawsuit, and management cronyism with the Obama administration, while it also found ways to enhance executives’ severance should the company change ownership. To emphasize the incompetence, A123 reported an $83-million loss in the second quarter, which followed losses of $85.8 million in 2009, $152.6 million in 2010, and $257.7 million last year.

The NASDAQ delisting threat could hold up the deal – certainly the vital $200 million second-tier financing – until at least February, unless A123 manages to move its stock price above $1 for 10 consecutive business days. The last time it was over $1 was July 9, and the Wanxiang agreement was supposed to launch it upward again, but instead it has lurched to its lowest level ever since joining NASDAQ in late 2009.

That A123 can’t make a deal with the Chinese to buy them on the cheap, without these seemingly insurmountable complications, highlights the bind they are in. Even more, it screams loudly about the ineptness, cronyism and poor judgment within the Obama administration’s and Department of Energy’s Green stimulus program.

These kinds of government-in-bed-with-business deals work when Communist dictators call the shots at the point of a gun; In representative democracies, not so well.

Paul Chesser is an associate fellow for the National Legal and Policy Center and publishes CarolinaPlottHound.com, an aggregator of North Carolina news.