Kodak Said to Weigh Bankruptcy Filing to Clear Path for Selling Patents

By Jonathan Keehner and Jeffrey McCracken - Oct 1, 2011 11:01 AM GMT+0700
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A number of suitors, such as Google Inc., have signed confidentiality agreements to examine Eastman Kodak Co.'s assets. Photographer: Jacob Kepler/Bloomberg

Eastman Kodak Co. (EK), the unprofitable 131-year-old camera maker, is weighing options including a bankruptcy filing because of concerns raised by possible buyers of its patent portfolio, said three people with direct knowledge of the process.

Some potential bidders for the patents are wary of proceeding because a purchase may amount to a so-called fraudulent transfer if Kodak is insolvent, said the people, who asked not to be named because the talks are private. Kodak confirmed that it hired Jones Day to advise it on considering options and said it doesn’t plan to seek bankruptcy protection.

“As we sit here today, the company has no intention of filing, and there is no change in our strategy to monetize our intellectual property,” Gerard Meuchner, a spokesman for Kodak, said yesterday. “We’re not concerned about fraudulent conveyance in regards to the sale of our IP portfolio.”

The company will make a $14 million coupon payment due today, he said. Meuchner declined to comment on whether the company had discussed a potential filing with law firms, saying that Kodak is “focused on the fourth quarter and on delivering on our strategy to become a profitable, sustainable digital company.”

A number of suitors, such as Google Inc., have signed confidentiality agreements to examine the assets, said the people. If a sale was judged fraudulent, creditors may sue for more money, said one of the people. A bankruptcy filing may help clear the way for a patent sale, said the people. The sale could fetch about $3 billion, MDB Capital Group estimates.

Law Firms

Kodak also has discussed its options with law firm Kirkland & Ellis LLP, the people said. Companies may hire bankruptcy or restructuring counsel to advise on options besides bankruptcy, including debt restructuring, asset sales or operational improvements. Lazard Ltd. (LAZ) is advising Kodak on options for the patent portfolio.

Kodak plunged 91 cents, or 54 percent, to 78 cents a share yesterday in New York Stock Exchange composite trading, the biggest drop since at least 1974. Trading was halted four times by circuit breakers introduced following the May 6, 2010, crash to prevent losses in one security from spreading throughout the stock market.

The cost to protect Kodak’s debt from default jumped. Credit-default swaps linked to the company rose 4 percentage points to 66.5 percent upfront, according to data provider CMA. That means investors would pay $6.65 million initially and $500,000 annually to protect $10 million of Kodak’s debt for five years.

Debt Rating

Kodak’s debt is rated CCC by Standard & Poor’s and Caa2 by Moody’s Investors Service. The ratings are the eighth levels below investment grade at each firm.

A representative from Kirkland declined to comment. Katelin Todhunter-Gerberg, a spokeswoman for Mountain View, California- based Google, didn’t immediately respond to voicemail and e-mail messages seeking comment, nor did an official for Jones Day.

Moody’s cut Kodak’s bond ratings Sept. 27 and indicated further reductions may follow, citing “ongoing weakness” in the company’s operations. Kodak, which tapped a credit line last month, has seen its market value sink by more than $30 billion from its 1997 peak.

Chief Executive Officer Antonio Perez, who took the helm in 2005, has sharpened Kodak’s focus on the printing business to help revive revenue. Perez announced plans in July to explore options for the portfolio of more than 1,100 patents, including some for processing, editing and storing images.

‘A Conundrum’

“What’s facing Kodak is whether it can give assurances to third-party buyers that they’re not going to get sued,” Mark Kaufman, an analyst at Rafferty Capital Markets in New York, said yesterday by telephone. “Here’s the irony: If they sell the assets for a good price, the issues of insolvency are over. It’s a conundrum.”

A bankruptcy filing “would be a mechanism to get this asset sale done,” said Kaufman, the only analyst among seven tracked by Bloomberg who rates Kodak as “buy.” He values the patents at $2.4 billion.

Kodak’s sales have fallen by half since 2005 to $7.2 billion last year, with further declines predicted this year and next. The company’s losses since 2008 exceed $1.76 billion.

Kodak, whose origins date back to 1880, was founded by George Eastman, who introduced the Kodak camera eight years later, according to the company’s website. Kodak has shifted away from traditional film as consumers gravitated toward digital cameras.

Kodak Investors

Kodak’s top debtholders include Fidelity Management & Research, Fidelity International, Banc One Investment Advisors, Davidson Kempner Capital Management LLC and OppenheimerFunds Inc., according to Bloomberg data.

Fidelity and its affiliates ranked as the largest Eastman Kodak shareholders as of June 30 with a combined 24.4 million shares, most of which was held in the form of bonds that are convertible into common stock, according to regulatory filings.

The largest owner of actual Kodak stock was Legg Mason Inc. (LM)’s LMM LLC, which held 18.2 million shares outright, the equivalent of a 6.8 percent stake, when the second quarter ended, the filings show.

To contact the reporters on this story: Jonathan Keehner in New York at jkeehner@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; David Scheer at dscheer@bloomberg.net; Robin Ajello at rajello@bloomberg.net