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Wanxiang Contests JCI for A123

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Johnson Controls Inc. (JCI - Free Report) now has a new contestant in its attempt to buy the bankrupt automotive operations of Waltham, Massachusetts based lithium-ion battery maker A123 Systems Inc. China’s auto parts conglomerate Wanxiang Group Corp. has got its awaited approval by the Chinese Commerce Ministry to buy all the assets of A123.

A couple of months back, Wanxiang Group revealed that it will place superior bid for A123 compared to what Johnson Controls has offered ($125 million) as the deal with the latter is subject to a court-supervised auction. A123 and all of its U.S. subsidiaries have already filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court.

A123 had tough times dealing with lower orders for Karma plug-in hybrid from its leading customer Fisker Automotive (which has generated 26% of the company’s revenues in 2011) in October last year and a costly recall of battery packs made for the same company this year.

A123 was also highly disappointed with its failed $465 million deal with Wanxiang. At the beginning, Wanxiang gave $22.5 million loan to A123, including a cash advance of $12.5 million.

Future cash flows from Wanxiang were dependent on meeting certain requirements by A123, such as getting approval from the Committee of Foreign Investment and the Chinese government as well as the absence of any default. However, A123 failed to meet some of those conditions and the deal failed shortly before its bankruptcy filing.

Lastly, weaker-than-expected demand for hybrids had adversely affected the company’s bottom line. All these factors led to bankruptcy filing of the company that is only 11 years old.

A123 was entitled to receive $249 million grant from the U.S. Department of Energy (D.O.E.) under the $90 billion grant for several clean-energy programs in 2009. Till date, A123 has utilized $132 million of the D.O.E. grant, which is about half of the total amount. D.O.E. will decide on the remaining grant later after the new owner of A123 takes control.

Johnson Controls believes the acquisition of A123 assets will strengthen its existing portfolio and help maintain the market leading position. The company is optimistic about the fuel-efficient vehicles market. It is confident that newer technologies in powertrain and energy storage solutions will be implemented over the coming years.

Johnson Controls, a Zacks #5 Rank (Strong Sell) company, reported adjusted earnings per share of 77 cents for the fourth quarter of its fiscal year ended September 30, 2012, ahead of the Zacks Consensus Estimate of 75 cents and up 1.3% from 76 cents a year ago. Earnings were in line with management's expectation of 0% to 5% growth in the quarter.

Management believed earnings had favorable impacts from the improved profitability in Building Efficiency, Power Solutions and North America Automotive Experience businesses. However, these were offset by weak performance in automotive and buildings markets in Europe.

The company’s revenues for the quarter decreased 3.6% to $10.4 billion. It was marginally lower than the Zacks Consensus Estimate of $10.8 billion. However, excluding the impact of foreign exchange, revenues grew by 1% in the quarter.

The company has not provided any specific guidance for fiscal 2013. It expects that earnings in the first half of fiscal 2013 will be lower than the year ago period due to weak end markets and adverse effects of foreign currency. However, it anticipates earnings will be higher in the second half of fiscal 2013 compared to the year-ago period, driven by positive impact from restructuring activities. Meanwhile, earnings in fiscal 2013 are expected to be flat or a bit higher than fiscal 2012.

Johnson Controls is a supplier of automotive interiors, batteries, and other control equipment. Its main competitors include Magna International Inc. (MGA - Free Report) in the Automotive Experience segment, Honeywell International Inc. (HON - Free Report) in the Building Efficiency segment and Exide Technologies in the Power Solutions segment.

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