China's largest auto parts maker got court approval Tuesday for its controversial purchase of A123 Systems Inc, a bankrupt maker of electric car batteries, but the judge said he was troubled that a US rival might be working to kill the deal.
A123, which was partly funded with US government money, was sold at an auction Saturday for $256.6 million to Wanxiang Group of China, which outbid Johnson Controls Inc of Milwaukee.
The auction result prompted outcry from US politicians who objected to A123's taxpayer-financed lithium-ion technology ending up in the hands of an economic rival. Johnson Controls has said it remains interested in A123 if Wanxiang fails to get approval from the US government, which is coming under pressure to block the deal.
"I'm troubled by suggestions that someone who participated in the auction may in fact already be working against it," said Delaware Bankruptcy Judge Kevin Carey at the end of Tuesday's hearing.
Carey ordered into escrow a $5.5 million fee from the sale that was earmarked for Johnson Controls' in return for it being the lead bidder to support the A123 auction. The money will be released when the sale closes or after an investigation by A123 creditors.
William Baldiga of law firm Brown Rudnick, who represents the official committee of unsecured creditors, had told Carey he had a confidential letter that suggested Johnson Controls planned to undermine Wanxiang if the Chinese company won the auction.
Johnson Controls attorney, Joshua Feltman of Wachtell, Lipton, Rosen & Katz, said the company should not be punished "because we sympathize with Michigan Congressional delegation."
A123 has several facilities in Michigan and its politicians have been vocal in opposing the sale to Wanxiang.
A123 has never turned a profit and received a $249 million grant from the US Department of Energy to develop lithium-ion batteries.
A Department of Energy (DOE) official said Monday the grant, which has about $120 million remaining, would not be transferred to Wanxiang.
CFIUS in focus
Opposition to the deal will now shift to the Committee on Foreign Investment in the United States (CFIUS).
Pressure has been building on Treasury Secretary Timothy Geithner, the head of the panel, to block the takeover.
Wanxiang has tried to blunt some of the political opposition by excluding A123's defense contracts from its bid.
But a group of former military leaders and industrial consultants said in a statement Tuesday that A123's commercial and defense businesses were too similar to allow the sale to a Chinese company. The group, the Strategic Materials Advisory Council, has urged Geithner to stop the sale.
A123's politically sensitive business that works with the US Defense Department was sold instead to Navitas Systems for $2.25 million.
Chinese firms have been pouring cash into overseas investments, and with that money have come concerns around the globe that firms with ties to the Chinese government may not play by free-market rules.
CFIUS recently rejected a bid to build wind farms in Oregon by Ralls Corp, owned by two executives of China's Sany Group, and has blocked multiple deals by Huawei Technologies Co, a Chinese telecom equipment manufacturer.
China's State-owned oil company CNOOC received approval Monday for the country's biggest foreign takeover, a $15.1 billion acquisition of the Canadian Nexen Inc after intense scrutiny. CNOOC withdrew its bid for California-based Unocal Corp in 2005 in the face of political opposition.
A123 filed for bankruptcy in October as demand for electric vehicles did not live up to expectations and it was forced to recall defective car batteries. Its customers include Fisker Automotive and General Motors.
Fisker, a hybrid-sports car startup based in Anaheim, California, has not built a car in six months and said Tuesday that it does not plan to restart production until after A123 concludes a court-managed sale.
"We plan to wait until Wanxiang takes full control of A123, then we will get in contact with them to negotiate a contract," said Fisker spokesman Roger Ormisher. Once a deal is reached with A123's new owner, he said, "we can resume Karma production." Until then, "we have a sufficient supply of cars," Ormisher said, who added, "We are not looking for a new battery supplier."
The creditors of A123 are supporting Wangxiang's bid, the creditors' attorney said Tuesday.
The battery maker's unsecured creditors "absolutely" support the sale to Wanxiang, said Baldiga of Brown Rudnick.
Dozens of objections to the sale were filed with the US Bankruptcy Court in Delaware. The most prominent objection might have been settled Monday, when the DOE official said the remaining $120 million of grant money would not be transferred to Wanxiang.
The Chinese company still needs the approval of the CFIUS to close the deal.
Baldiga said that if the foreign investment committee does not approve the sale in the coming weeks, Wanxiang could walk away, although it would forfeit a $25 million deposit that would go toward repaying A123's creditors.
If that were to happen, A123 could then go back on the block, and Johnson Controls has said it was "very interested" in bidding again. Johnson Controls and NEC Corp of Japan jointly made a final bid of about $251 million, according to Alex Molinaroli, president of Johnson Controls Power Solutions.
The only other company that qualified for the auction, Siemens AG of Germany, does not appear to have made a bid, according to a transcript of the auction.
If the foreign investment committee has not approved the sale by January 15, the deal could still close by transferring A123 to a trust controlled by US citizens.
Baldiga said there was "good precedent" for structuring the deal using such a trust, which would not need CFIUS approval.
In that case, the money from Wanxiang would be used to repay the creditors of A123, which filed for bankruptcy with $376 million in liabilities. It would then be up to Wanxiang to resolve any foreign investment committee objections.
The Chinese company is no stranger to investing in the US.
Wanxiang has generated about $1 billion in revenue in the US by supplying parts to GM and Ford Motor Co and has bought or invested in more than 20 US companies, many of them in bankruptcy, said a congressional report published in October.
Reuters - Global Times