Earlier this week, I was flooded with emails from colleagues, investors, and a few talk show producers looking to score an interview with me.
You see, it was this past Tuesday that the world woke up to the news that high-performance battery maker, A123 Systems (NASDAQ: AONE) was about to go belly-up.
There are two reasons this was such a big deal…
First, we’re talking about a company that manufactured high-performance batteries for electric vehicles. And as you know, any time there’s even a hint of negative news regarding electric vehicles, the world stops (at least that’s how some media whores and partisan slaves like to play it)…
It’s sad, really, considering electric vehicles do serve as one of many tools in our tool shed that can be used to kick OPEC to the curb. But that’s how it goes.
The second reason this was such a big deal (and in my opinion, the only legitimate reason) is because A123 Systems was the recipient of a $249 million federal grant back in 2009.
For those on the right, the media used this bankruptcy as ammunition for the argument that Obama’s energy agenda has been a failure.
While you may agree or disagree with that argument, the truth is this administration’s energy agenda isn’t far off from the energy agenda of his predecessor.
In fact, the loan program for alternative energy vehicles was actually created by the Bush administration.
Of course, we’re equal opportunity analysts here at Energy and Capital. We have insisted for years that such loan programs have never been anything more than rewards for those who are slick enough to get a dinner invite to the White House.
For those on the left, the media will conveniently write the whole thing off, using the argument that some investments just fail.
Sorry folks, that don’t fly when they’re making bad investments with my money — and without my permission.
But here’s the interesting thing: While the mainstream media battles it out on talk shows disguised as “news,” acting like the good little puppets Washington has groomed so well, investors are paying attention to a much more important result of this bankruptcy…
Finishing What Johnson Controls Started
Johnson Controls (NYSE: JCI) is pretty much a household name.
The company is a major player in the automotive battery and interior systems space, as well as a provider of equipment, controls, and services for buildings.
JCI was also one of the first high-performance battery manufacturers that focused on electric cars. This was years before electric cars were even on the road…
Before the Chevy Volt, before the Nissan LEAF, and before Tesla Motors (NASDAQ: TSLA) was even a public company, Johnson Controls and French battery company, Saft (PINK SHEETS: SGPEY), created a joint venture in an effort to combine Johnson Controls’ auto market swagger with Saft’s expertise in high-performance batteries.
The result was the first manufacturer to provide lithium-ion batteries for hybrid vehicles.
Last year that particular joint venture was dissolved after the two companies couldn’t agree on expansion plans.
And while the end of that deal really didn’t have much of an impact on JCI’s battery division — mostly because the company’s battery revenue still came from lead-acid batteries — we haven’t heard much from the company about its hybrid and electric vehicle battery development since then…
At least, not until this week.
The Deal of a Lifetime
You know what they say: One man’s loss in another man’s gain.
And boy is that the case with A123 Systems and Johnson Controls.
While pundits and spin doctors pumped out the rhetoric in an effort to either capitalize on the A123 news or run damage control, Johnson Controls pulled off what many now believe was the deal of a lifetime.
With A123 in full desperation mode, Johnson Controls was able to swoop in and buy the struggling company’s assets (pending approval), which included the company’s high-performance battery technology, its two Michigan manufacturing facilities and a factory in China, as well as its stake in a joint venture with Shanghai Automotive.
And Johnson Controls got all of this for the low, low price of $125 million. It’s a very sweet deal.
Interestingly, $73 million in financing was also ponied up to allow the company to maintain operations.
Despite my continued frustration over the fact that A123 has burned through 132 million of our taxpayer dollars (the entire $249 million has not been depleted), at least the company’s government-funded technology and advances won’t go gently into that good night, now that Johnson Controls has jumped in the driver’s seat.
Did Someone Say “Jobs”?
There was a great piece on CNN Money this week about the Johnson Controls acquisition, in which senior editor Brian Dumaine wrote:
By taking over A123, Johnson Control will help slow the export of intellectual property overseas. China recently invested in Boston Power, a Massachusetts maker of lithium-ion batteries. Earlier, a Russian investor bought Ener1, another struggling U.S. battery company. Michael Lew, an energy analyst at Needham & Company in New York explains it this way: “Johnson Controls is America’s best hope to have a thriving battery industry. If this industry is going to be a prolific job creator in the future, it makes sense to have a major presence here.”
There’s also a national security angle. As the U.S. military gravitates more toward electrified vehicles and naval vessels, including submarines, does the nation want this key technology to be solely in the hands of foreign nations?
I think Dumaine hit the nail on the head.
Truth is a gradual transition to vehicle electrification is happening.
It won’t happen overnight. If we’re lucky, electric vehicles should reach a one to 1.5% penetration by 2020…
But it is happening.
Because when you clear away the smokescreens of empty rhetoric and partisan buffoonery, there’s no denying the fact that electric cars can absolutely help us combat the growing threat of Peak Oil and the national security vulnerabilities that come with it.
As an investor, I currently have no direct exposure to the electric vehicle market. Because the truth is of the few pure plays that are still around, none offer the kind of safety or steady growth I’m looking for as we head into 2013.
But rest assured, the long view on electric vehicles is a promising one.
If you’re looking for exposure to this space, but don’t want the risk that comes with most of these younger, smaller niche players, you can always consider a few of the global power players that are increasingly becoming heavily invested in the electric vehicle space — like Johnson Controls, GE (NYSE: GE), Siemens (NYSE: SI), Eaton (NYSE: ETN), and Schneider Electric (PINK SHEETS: SBGSF).
Just keep in mind the development and integration of electric vehicles will be marathon, not a sprint.
Invest accordingly.
To a new way of life and a new generation of wealth…
Jeff Siegel
P.S. Energy and Capital‘s Nick Hodge will be a featured speaker at this year’s New Orleans Investment Conference next week. He’ll answer questions on the Energy Panel — along with Rick Rule — and he’ll also be giving a private 40-minute presentation on investing… Click here to learn more.
