A123 Will Test Appetite for Unprofitable Cleantech IPOs

In one of the first tests of the public market appetite for the newest venture-backed cleantech companies, lithium-ion battery supplier A123 Systems, Friday filed to go public on Nasdaq.

Investors in the Watertown, Mass., company seem to be fairly confident that money managers are hungry for alternative energy offerings, because just prior to the filing they invested another $102.1 million in Series E stock at $16.59 per share.

Since its founding in 2002, A123 Systems has raised approximately $266.1 million.

Major shareholders in A123 include North Bridge Venture Partners, which holds almost 14% of the company; General Electric, which has nearly 13%; and Motorola and Qualcomm, which each hold approximately 9% of the company. Other investors in A123Systems include Carruth Management, CMEA Ventures, individual investor and board chairman, Desh Deshpande; FA Technology Ventures, OnPoint Ventures, Procter & Gamble, and Sequoia Capital.

Details about the number of shares offered and estimated price range for the IPO wasn't disclosed in Friday's SEC filing. Some of the shares will be sold by selling holders.

A123 is one of a number of venture-backed companies that are developing advanced lithium-ion batteries for multiple market segments.

The company said that its biggest market is expected to be the transportation industry where it is working with automakers including Detroit-based General Motors Corp. (GM) and Aurskog, Norway-based Think Global AS on batteries and battery systems for vehicles.

In its filing, A123 Systems said the advanced battery market for hybrid electric vehicles, plug-in hybrids, and electric vehicles is currently $700 million, but that the company expects that market to grow to $5 billion by 2012.

The battery technology developer and manufacturer also said that it is working on battery systems that would improve the reliability and output of the electric power grid and to enhance the efficiency and dependability of utility operations. A123Systems is working with Richmond, Va.-based AES Corp. (AES) to engineer, manufacture and install these types of battery systems. A123Systems estimates that that market, already at $2.4 billion, could reach $3.1 billion by 2015.

Finally, the company also manufactures batteries for power tools and other high-power portable devices. Historically it's this market that's been A123Systems' bread and butter, accounting for the majority of the company's revenue and its first paying customer, Towson, Md.-based Black & Decker. A123 said that the power tool market was $411 million in 2007 and will grow to $1.1 billion.

Still, with so many opportunities in front of it, not all investors or analysts are convinced that A123Systems' technology is still leading the industry. "Their technology advantage is decreasing," said one industry consultant. "It took longer to develop the technology than they had hoped and they weren't able to protect their technology as much as they claimed."

One hedge fund analyst with knowledge of the company also raised the issue of patent liabilities that the company could face and a continuing problem with 'thermal runaway' - batteries catching fire - considering one of its cells burned up in a production bus.

Craig Irwin, vice president equity research at the New York-based financial services firm Merriman Curhan Ford Group, acknowledged there is skepticism in the battery industry about A123Systems, but said that the technology is still viable.

"Their technology works," Irwin said. "It's typically normal for a battery company to have battery events (such as the fire) while commercializing new products...Panasonic is recognized as one of the leaders in lithium ion technology and a couple of years ago they had a factory almost burn to the ground."

A123Systems' co-founder and vice president of business development, Ric Fulop, didn't respond to a request for comment for this report.

In its filing, A123Systems reported that for the three months ended March 31 it registered a net loss of $13.9 million, widening from a loss of $4.6 million in the comparable period of 2007. The company said that it expected to see losses continue in 2008 and 2009.

Meanwhile, net proceeds from the IPO will be used for capital expenditures, working capital and other general corporate purposes, including the expansion of manufacturing facilities, repayment of $2.5 million in debt, research and development and sales and marketing expansion. It said the fresh cash from its most recent funding round would be used to expand its manufacturing capabilities, for general working capital and for potential acquisitions. But, the company said it hadn't identified any specific acquisition targets.

Morgan Stanley, Goldman Sachs, Merrill Lynch, BroadPoint and Lazard Capital Markets were listed as underwriters for the offering.

A123 said it plans to list its shares on the Nasdaq Global Market under the symbol AONE.

By Jonathan Shieber, VentureWire/Dow Jones Newsletters; 201-938-4305

(END) Dow Jones Newswires

Posted to the site on 11th August 2008