Ever-ready batterymaker

Tuesday 1st May 2001

Investors have been waiting a long time to exit the former Pacific Lithium, now Ilion Technology. But a name change, a PR mess, a collapsing tech market and yet another round of private funding are straining their patience

Robin Johannink is remarkably calm, upbeat even. On the phone from Milan late at night, the executive chairman of New Zealand's Ilion Technology says it may be a "blessing in disguise" that his company's US initial public offering has been delayed - by up to a year.

Maybe it's the Italian air, but didn't this sort of optimism die with last year's tech wreck? Not according to Johannink, whose ability to keep shareholders confident in the face of trouble is nothing short of remarkable. Ilion's delay has meant a long wait for the company's 1300 shareholders, including well-to-do New Zealanders Stephen Tindall and Murray Haszard, and big-fry investors like the Singapore government, Nissho Iwai Corporation and the Massachusetts Institute of Technology. They haven't been able to trade their shares, even on the grey market, since last October. A number of them have been with the company from the outset and have let Johannink know they want to be able to sell or part-sell their holdings.

"The company wants to provide liquidity to its shareholders in due course, but it's not going to if the market is too low," he says.

Ilion's shares last traded at $US6.50 a share.

Foundation shareholders will be used to the bumpy ride. Set up in 1994, Auckland-based Pacific Lithium set out to extract lithium from seawater. When this didn't work it changed tack, producing lithium carbonate. It now has a market share of more than 25% of the lithium ion batteries manufactured worldwide. It has also developed advanced manganese cathodes - the key material in driving down the price of lithium batteries. Not content with that, it moved from producing materials to developing the finished lithium battery cells. In a shareholder update this year, the company said its Big Hairy Audacious Goal was to have a lithium power source in every distributed power device. It's like reading one of those sci-fi mags where the mad scientists plan to take over the world.

Shareholders lapped all this up. Last May they approved the board's plan to migrate closer to the action in the US, change the company's name to Ilion Technology, raise $US120 million in an IPO and list on the technology-oriented Nasdaq stock exchange.

Concurrent with the listing is the proposed controversial merger with US company Lithium Technology Corporation (LTC). It created a patented technology for making the cheaper polymer rechargeable batteries that give Ilion an edge in the market, particularly for use in hybrid electric vehicles.

But the audacious is turning into the hairy. For a start, Ilion's timing couldn't have been worse. Technology stocks started to bomb just after Ilion set up headquarters in Boston - and boy, have they bombed. The Nasdaq's value has halved in the last six months and even optimistic market pundits reckon it will take up to another six months to bounce back. Johannink estimates it will now be the third or fourth quarter of the year before Ilion's listing can proceed, although it is in a "state of readiness", with draft documentation prepared for filing.

To cover any cash-flow problems, the company is currently raising $US15 million from private investors and will scale back the IPO, when it finally happens, by that amount. It has calculated $US15 million is how much it needs to get cash-flow positive and enlarge its Auckland plant (run by its New Zealand subsidiary Pacific Lithium NZ) and build a Boston plant to ensure it can meet its forward sales contracts. Funding for further ambitious expansion and acquisition plans await the money raised on listing.

How is Johannink selling this to shareholders? The way he sees it, if Ilion gets the $US15 million and generates the sales and profits it hopes to in the next nine months, that should "substantially improve the valuation of Ilion on listing".

Fraud conviction

While Johannink blames market conditions alone for the delay, LTC shareholders raise another possible fly in the ointment - the recent fraud conviction of former LTC sales and marketing manager Joseph Calio. He pleaded guilty to fraud last month for making a substantial bribe to a Sears Roebuck buyer, back when he was vice-president of battery manufacturer Exide. He left Exide in 1996 and worked for LTC until late last year.

Calio's conviction could have affected Ilium's listing, because the US Securities and Exchange Commission investigates both corporate and upper-management backgrounds "big-time" before an IPO and merger, opines one shareholder on the Raging Bull internet message board.

Phooey, says Johannink; Joe Calio isn't even a blip on the radar screen. "To be honest, we knew nothing about Calio until it came up on Raging Bull," Johannink says. "He didn't have a senior role with the company [LTC] because it didn't have anything to sell. It has zero impact on us."

In any event, it is a PR mess management needs to address, says another LTC shareholder on Raging Bull. They question how Calio came to be hired and why he was kept on so long, when news of Exide's improper dealings first surfaced in the US financial news in 1998.

Further draining Ilion's cash flow has been its monthly funding of LTC's working capital since October 1999 - a total of $US3.5 million so far. LTC's share price, along with most other US shares, has tanked, dropping from a year's high of $US1.38 to just 13 US cents a share.

This could be another of Johannink's "blessings". The whole merger is off if it isn't consummated by February next year. "You have to appreciate we've had 90% of the overall value out of the merger already," he says. Moreover, if the merger falls over, Ilion can convert its funding to shares. At a strike price of 10 US cents, this could buy around 35% of LTC, sufficient for control.

This wouldn't be such a bad idea according to one Ilion shareholder, Auckland accountant Bruce Sheppard. In fact, he'd like the whole deal, merger and IPO, called off. The company will "get butchered" if it lists on the Nasdaq, he says, so the money should be sought elsewhere.

Johannink insists listing is a matter of when, not if. Choosing between being butchered on listing and long delays must make shareholders feel like they're between a rock and a hard place.

Fiona Rotherham
fiona@unlimited.net.nz

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