By Tom Hals
WILMINGTON, Delaware (Reuters) - China's largest auto parts maker got court approval on Tuesday for its controversial purchase of A123 Systems Inc, a bankrupt maker of electric car batteries, but the judge said he was troubled that a U.S. rival might be working to kill the deal.
A123, which was partly funded with U.S. government money, was sold at an auction on Saturday for $256.6 million to Wanxiang Group of China, which outbid Johnson Controls Inc of Milwaukee.
The auction result prompted outcry from U.S. politicians who objected to A123's taxpayer-financed lithium-ion technology ending up in the hands of an economic rival. Johnson Controls has said it remains interested in A123 if Wanxiang fails to get approval from the U.S. government, which is coming under pressure to block the deal.
"I'm troubled by suggestions that someone who participated in the auction may in fact already be working against it," said Delaware Bankruptcy Judge Kevin Carey at the end of Tuesday's hearing.
Carey ordered into escrow a $5.5 million fee from the sale that was earmarked for Johnson Control's in return for it being the lead bidder to support the A123 auction. The money will be released when the sale closes or after an investigation by A123 creditors.
William Baldiga of Brown Rudnick, who represents the official committee of unsecured creditors, had told Carey he had a confidential letter that suggested Johnson Controls planned to undermine Wanxiang if the Chinese company won the auction.
Johnson Controls attorney, Joshua Feltman of Wachtell, Lipton, Rosen & Katz, said the company should not be punished "because we sympathize with Michigan Congressional delegation."
A123 has several facilities in Michigan and its politicians have been vocal in opposing the sale to Wanxiang.
A123 has never turned a profit and received a $249 million grant from the U.S. Department of Energy to develop lithium-ion batteries.
A Department of Energy official said on Monday the grant, which has about $120 million remaining, would not be transferred to Wanxiang.
Opposition to the deal will now shift to Committee on Foreign Investment in the United States (CFIUS).
Pressure has been building on Treasury Secretary Timothy Geithner, the head of the panel, to block the takeover.
Chinese firms have been pouring cash into overseas investments, and with that money has come concerns around the globe that firms with ties to Beijing may not play by free-market rules.
CFIUS recently rejected a bid to build wind farms in Oregon by Ralls Corp, owned by two executives of China's Sany Group, and has blocked multiple deals by Huawei Technologies Co, a Chinese telecom equipment manufacturer.
China's state-owned oil company CNOOC Ltd received approval on Monday for the country's biggest foreign takeover, a $15.1 billion acquisition of Nexen Inc after intense scrutiny. CNOOC withdrew its bid for California-based Unocal Corp in 2005 in the face of political opposition.
Wanxiang has tried to blunt some of the political opposition by excluding A123's defense contracts from its bid.
A123 filed for bankruptcy in October as demand for electric vehicles did not live up to expectations and it was forced to recall defective car batteries. Its customers include Fisker Automotive, General Motors Co and BMW.
If the foreign investment committee does not approve the sale in the coming weeks, Wanxiang could walk away, although it would forfeit a $25 million deposit that would go toward repaying A123's creditors.
If that were to happen, A123 could then go back on the block. Johnson Controls and NEC Corp of Japan made a final runner-up bid of about $251 million, according to Alex Molinaroli, president of Johnson Controls Power Solutions.
The only other company that qualified for the auction, Siemens AG of Germany, does not appear to have made a bid, according to a transcript of the auction.
If the foreign investment committee has not approved the sale by January 15, the deal could still close by transferring A123 to a trust controlled by U.S. citizens, which would not need CFIUS approval.
Wanxiang's money would then be turned over to repay the creditors of A123, which filed for bankruptcy with $376 million in liabilities.
The Chinese company is no stranger to investing in the United States.
Wanxiang generates about $1 billion in revenue in the United States by supplying parts to GM and Ford Motor Co and has bought or invested in more than 20 U.S. companies, many of them in bankruptcy, said a congressional report published in October.
The case is A123 Systems Inc, Delaware Bankruptcy Court, No. 12-12859.
(Reporting By Tom Hals; Editing by Martha Graybow and John Wallace)