A123 Bringing Sexy Back to Cleantech IPOs?

a123_battery_07After the Nasdaq opening bell rings Thursday morning, keep an eye out on the ticker for the symbol “AONE,” which represents Watertown, Mass-based battery startup A123Systems. The company is expected to set its price on Wednesday and trade Thursday and represents the first spot of relief after a long dry spell for cleantech IPOs.

If it goes well, the debut could symbolize renewed investor appetite for IPOs and public confidence in electric cars and establish energy storage as sexy technology, once and for all. A123 certainly seems confident. The company raised its estimated price range to between $10 and $11.50 per share Tuesday, up from a previous range of $8.50 to $9.50 per share, for an offering worth up to $339.62 million, including shares set aside for underwriters in case of over-allotments.

Eight-year-old A123 expects to raise up to $247.7 million in net proceeds from the offering. It’ll need the money to fund its big manufacturing plans, even with all the help from the Department of Energy. The company also could use some of the money to buy other companies, assets or technologies to expand its business, according to its prospectus.

A123 – as well as its investors and the industry – stands to lose if the offering flops or comes out tepid. Much depends upon larger market factors and the company could be jumping the gun after waiting more than a year for market conditions to improve. As this Reuters story points out, the offering is happening amid eight deals this week, which will test investors’ tolerance for risk, and also will represent the first IPO this year by a company that has never made a profit.

In its prospectus, A123 reported a net loss of $41.2 million in the first half of this year, compared to $30.9 million in the same period last year, and also saw higher annual losses in each of the last three years.

Even if the IPO is a resounding success, A123 will still have plenty of hurdles to jump to grow its manufacturing, reach profitability and gain a significant market. As the company discusses in its filing, it is competing against larger companies with more resources – the battery industry has been notoriously difficult to break into – and it relies on a limited number of customers, making it more vulnerable if it loses one.

In addition, the government grants, loans and other incentives it has applied for aren’t sure things, as it needs to negotiate and meet certain conditions to get the money. A123 also depends on the automotive industry – read small margins and heavy price pressure – for most of its business. That means it could be affected by the pain that that industry is suffering. And it’s betting on a small and risky part of the industry, electric vehicles. Also don’t forget the patent litigation for the power-tool-battery technology it sells to Black & Decker, which still hasn’t been resolved.

Still, the company definitely has seen a marked improvement in market conditions over the last year. Batteries are seeing unprecedented government support, and in spite of the recession, venture capital has continued to flow to battery startups, especially to lithium-ion technologies. The U.S. battery industry is seeing what Sara Bradford, a principal consultant for global research firm Frost & Sullivan, has called “a renaissance.”

And A123 specifically has won strong votes of confidence from large names. It has this year raised $69 million in venture-capital funding, scored a $249.1 million DOE grants and signed deals to supply electric-vehicle batteries to Chrysler and a grid battery to Southern California Edison.

PowerGenix, which is developing nickel-zinc batteries for consumer electronics, power tools and hybrid vehicles, is optimistic about A123’s public debut. “From the standpoint of startup companies, this hopefully marks the rebirth of the IPO market after the recession, … and from the standpoint of cleantech and battery startups this is obviously very important,” said Richard Brody, vice president of business development. “It’s signaling the maturation process of cleantech as a sector. We’re entering a new phase in the history of batteries where energy storage is going to become a more critical part of the whole power generation, transportation and energy efficiency sectors.”

If A123’s IPO is successful, we’d expect to see other companies rush to raise money before investor interest wanes. But Brody said he believes there’s still plenty of room for higher valuations in energy storage as the cleantech industry grows, and also expects investors will have plenty of appetite for energy-storage companies that target different applications.