In A123 Battery IPO, Buffett Indirectly Wins (AONE, BRK-A, GE, QCOM, MOT, SCMR, AB, PG, AAPL)

Next week is still supposed to mark the initial public offering of what me be a very hot IPO.  Auto electric-battery maker A123 Systems Inc. is tentatively set to launch and begin trading mid-next-week under the stock ticker “AONE” on NASDAQ.  We have penciled in a date of September 23 or 24, but if you have been watching IPOs for years you know that date can change.  This one has been in the IPO hopper almost forever as the IPO filing date was in August 2008.

We’ll get to this a little later, but we did note in the title that Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A) may be the indirect winner here in this offering.  A123 raised a fairly recent round led by General Electric Co. (NYSE: GE) and affiliates, which has a 11.7% stake.  At the time the company filed to come public it has raised roughly $160 million and it has large stakes held by venture capital firms (North Bridge, Sequoia and others), Qualcomm Inc. (NASDAQ: QCOM) has a 7.6% stake and Motorola Inc. (NYSE: MOT) has a 6.9% stake.  Gururaj “Desh” Deshpande, the co-Founder and Chairman of Sycamore Networks, Inc. (NASDAQ: SCMR), also has a 9.9% stake.  AllianceBernstein Holding L.P. (NYSE: AB) and Procter & Gamble (NYSE: PG) are also listed under the investors of the company.

It has received a $249 million grant from the U.S. government and the State of Michigan has awarded it a $10 million grant and offered it up to $4 million in low interest loans as an incentive to establish a lithium-ion battery manufacturing plant in Michigan.  The company has also applied for direct loans under the DOE’s $25 billion Advanced Technology Vehicles Manufacturing Loan Program to support this manufacturing expansion, and it believes it will be permitted to borrow up to $235 million under the DOE program.

The terms of the deal are 25.68+ million shares expected in a range of $8.00 to $9.50 per share.  Lead underwriters are listed as Morgan Stanley and Goldman Sachs, with additional underwriters listed as Bank of America Merrill Lynch, Deutsche Bank Securities, Lazard, and Pacific Crest Securities.  25 million shares are being sold by the company and some 680,501 shares are being sold by insiders.  The company noted that it will have 100,426,049 common shares outstanding after the IPO, so its implied market cap at the mid-point of the offering will be approximately $875 million.

A123 Systems is in a sweet spot as it makes rechargeable lithium-ion batteries used in hybrid-electric and electric vehicles.  But the company has also never been profitable and is not cash flow positive.  So it is a high-risk IPO, but it also comes with a huge potential gain ahead because of the notion that electric cars and hybrid vehicles are still going to be the next new thing in autos with a currently very low market penetration.

It has a very impressive lsate of customers and partners which includes making batteries for BMW, Chrysler, GM, Shanghai Automotive Industry Corp., and Delphi.  A123 is also working on battery and power designs for new markets in trucks and buses, and even for parts of the electric power grid.  It sells smaller batteries for Gillette under P&G and sells batteries for cordless tools of Black & Decker.

Warren Buffett is not an investor in A123.  But the reason Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A) will indirectly win from this is because of a large stake that was taken in BYD in China.   BYD is a Chinese battery, mobile phone, and electric car company.  Fortune magazine noted Buffett’s right hand man, Charlie Munger, called BYD founder Wang Chuan-Fu something to the tune of a cross between Thomas Edison and Jack Welch.  Berkshire Hathaway bought 10% of BYD for $230 million and Wang turned down an offer to buy a 25% stake in the company.  BYD’s revenues in 2008 almost made the $4 billion mark.

BYD has also begun selling a plug-in electric car with a backup gasoline engine, and sells cellphone batteries and batteries for other consumer electronics such as Apple Inc. (NASDAQ: AAPL) and its iPod and iPhone. And the new goal is to make the batteries recycleable.  BYD trades under the Hong Kong ticker “1211” and here is fundamental data on the stock.  This A123 IPO from A123 is going to allow for more direct comparisons of battery makers, even if it is somewhat indirect and cross-border.

Back to A123…. During the year ended December 31, 2008, 18%, 76%, and 6% of A123’s product revenue was derived from sales in the transportation, consumer, and electric grid markets, respectively. In the first half of 2009, 70% of A123’s product revenue was derived from sales in the transportation market and 30% was derived from sales in the consumer market.

A123 said in its latest IPO documentation, “We estimate that the net proceeds to us from this offering will be approximately $201.8 million and the net proceeds to the selling stockholders will be $5.5 million, assuming an initial public offering price of $8.75 per share…. “ The selling stockholders consist of our chief executive officer and all of its founders.
A123’s latest amendment to its S-1 is here.

JON C. OGG
September 15, 2009