A123Systems Takes a Post-Stimulus & Bailout Look at IPO

Much has changed for battery maker A123Systems since it first filed to go public nearly a year ago. In the fourth and latest revision to its SEC registration statement, filed last week, the company has laid out some of the opportunities — and potential pitfalls — that it faces as a result of new government incentives and ongoing tumult in the auto industry. The company filed its last amendment to this statement back in November 2008, so this revision offers an interesting survey of how the landscape has changed in 2009 — and how the company’s prospects look for what venture capitalist Steve Westly recently told fellow cleantech investors could be a blockbuster year for cleantech IPOs.

The key point in the new amendment is this: With government aid, we can expect a massive effort to build out a U.S. battery industry, and A123 aims to take the lead. But without it, companies like A123, which now does manufacturing primarily in Korea and Changzhou, China, just might stick with the sector’s existing hot spots overseas. As the company writes in its latest filing:

If we receive sufficient federal and state incentive funding, we plan to aggressively expand our domestic battery manufacturing capacity. This expansion would complement our existing manufacturing facilities in Asia.

A123 has its eye on two government programs in particular, both under the Department of Energy: the Electric Drive Vehicle Battery and Manufacturing Initiative (a grant program created under the stimulus package) and the long-delayed Advanced Technology Vehicles Manufacturing loan program. A123 notes that it has requested up to $438 million in grants under the $2 billion stimulus-funded program to support its “manufacturing expansion in the United States.” For this initiative, as well as the ATVM program, A123 notes that it will have to “spend up to one dollar of our own funds for every incentive dollar we receive from the federal government,” a reminder that even approval from the DOE does not represent the final financing hurdle for A123’s planned factories.

A123 has managed to secure some government aid at this point as part of Michigan’s drive to attract jobs in the nascent advanced battery industry. The state pledged in April to offer a 50 percent credit for the company’s capital investment expenses for a new battery cell plant there, up to $100 million over a four-year period if the company can create at least 300 jobs with the project. Michigan has also pledged 15 years of tax credits (worth up to $25.3 million, depending on the number of jobs A123 creates in the state). According to A123, however, the cell factory plans still hinge on “adequate funds from the DOE.”

As Alternative Energy Stock’s John Petersen points out, these programs could have a big impact on the size of A123’s public offering. “Since ATVM loans will require 20 percent cost sharing and direct federal grants will require 50 percent cost sharing,” he writes, “the IPO will probably be a good deal larger than the $175 million contemplated by A123’s original filing.”

Aside from the spigot of funds that has opened up for A123’s sector in recent months, another important shift has taken place. Whereas A123 in November touted its relationship with General Motors (s GM) as a point of strength — an example of its “industry-leading partners in focused markets” — relying on business from big automakers has serious pitfalls. The company writes:

The viability of the “Big Three” U.S. auto manufacturers, particularly GM and Chrysler, remains unclear. As a result, these or other automotive manufacturers may discontinue or delay their planned introduction of HEVs, PHEVs or EVs as a result of adverse changes in their financial condition or other factors.

Financial trouble in the auto industry could also force A123 to compete more aggressively on price, the company writes, since car companies may be looking for battery systems that are generally more cost-effective or “require fewer modifications in standard manufacturing processes” than A123’s offerings. Plus, it may have to deal with delayed or lost payments from struggling automakers. So while A123 has a chance to be a front-runner in the U.S. battery industry, it also has a tough climb ahead.