Chinese auto parts maker Wanxiang Group is the winning bidder of the bankruptcy auction for some of the assets of A123 Systems Inc., a battery maker and alternative-energy company that had received funding from the U.S. government.

Wanxiang agreed to pay $256 million for A123's automotive and commercial operations, including its three factories in the U.S. Assets include all of A123's technology, products, customers, and factories in Michigan, Massachusetts and Missouri, which are expected to continue operating. Wanxiang would also take over A123’s operations in China, including its interest in a joint battery venture with the country’s biggest carmaker Shanghai Automotive.

The sale does not include A123’s business with the U.S. government and its military contracts. That portion of the company will be sold to Navitas Systems, an energy company based in Woodridge, Ill., for $2.2 million. The unit was spun off to Navitas as a means of addressing concerns about transferring sensitive military technology to Wanxiang.

Stalking-horse bidder Johnson Controls Inc. (NYSE: JCI), which had entered into an agreement to buy A123's assets when it filed for bankruptcy protection in October, will receive a breakup fee of $7.68 million, plus expense reimbursement, estimated at around $4 million, according to court documents. Johnson’s stalking-horse bid was for $116 million, plus some assumed liabilities. 

Wanxiang trumped that deal, however, with its aggressive pursuit as part of an auction that ended Dec. 9.

Before A123 filed for Chapter 11, Wanxiang offered to make a $465 million investment. The investment included a $25 million credit extension that A123 was set to receive in August.

But A123 had built up roughly $857 million in debt, forcing it to file bankruptcy on Oct. 16.

The deal is expected to expand Wanxiang’s share of the global market for lithium-ion batteries, which are used in electric cars. The buyer's subsidiary, Wanxiang America, is based near Chicago and owns several auto-parts firms.

The transaction still requires approval of U.S. bankruptcy judge Kevin Carey and the approval of the Committee on Foreign Investment in the United States, an interagency group chaired by the Department of the Treasury that reviews foreign takeovers of American companies. A sale hearing is scheduled for Dec. 11, court doucments show.

A123, which is based in Waltham, Mass., sought bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware in Wilmington. The company had received a $249 million grant from the U.S. government after the U.S. Department of Energy put aside about $90 billion for clean-energy programs through a stimulus package.

Energy companies Solyndra, Beacon Power Corp. and Abound Solar also received government funds and sought bankruptcy protection.

But electric vehicles have not sold as well as proponents for clean-energy hoped, causing A123 to struggle. The company also experienced a setback when a large shipment of hose clamps, components used for the internal cooling system of its batteries, that were supplied to Fisker Automotive Inc. were defective and needed to be recalled.

The bankruptcy auction began last week, when Wanxiang, Johnson Controls, and the electronics makers NEC Corporation of Japan and Siemens AG of Germany submitted bids for A123’s assets.

The agreement announced by A123 on Sunday said that Wanxiang made the highest bid, but did not disclose the other offers.

Law firms Latham & Watkins and Richards Layton & Finger are serving as legal counsel, while Lazard served as financial adviser. Alvarez & Marsal is serving as A123’s restructuring adviser.

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