Bloomberg News

Kodak Worth More in Breakup With $3 Billion Patents: Real M&A

August 17, 2011

Aug. 17 (Bloomberg) -- Eastman Kodak Co. may hold patents worth five times more than the business itself, making the 131- year-old camera company a target in the billion-dollar hunt for inventions used in mobile phones.

Kodak, which once had a market value of more than $30 billion, slid 98 percent from its 1990s peak through yesterday as demand for film photography withered and smartphones equipped to take pictures siphoned off demand for its digital cameras. The Rochester, New York-based company has reported losses in five of the past six years and has less than $600 million in equity value, according to data compiled by Bloomberg.

The digital-imaging patents owned by Kodak may now be worth $3 billion in a sale, MDB Capital Group said, after Google Inc. paid a dot-com era premium to acquire Motorola Mobility Holdings Inc. and obtain its more than 17,000 patents to combat Apple Inc.’s iPhone. While Kodak has a $1.2 billion pension shortfall, potential buyers such as Microsoft Corp. and Samsung Electronics Co. stand to profit from its technologies that are used in 85 percent of digital cameras and smartphones, according to Rafferty Capital Markets LLC.

“Kodak is the lowest hanging fruit out there,” Chris Marlett, chief executive officer at MDB Capital, a Santa Monica, California-based investment bank specializing in intellectual property, said in a telephone interview. Kodak’s patents “could go for a huge number and nobody’s talking about it,” he said.

Kodak’s Founding

Christopher Veronda, a spokesman for Kodak, referred to its July 20 announcement, which said the company was exploring options for its digital-imaging patents, “a move reflecting the current heightened market demand for intellectual property.”

Kodak’s shares surged 26 percent to $2.69 today, the biggest advance since March 2009.

The company was founded by George Eastman, a high school dropout. Kodak, which received a U.S. patent for photographic film in 1884, went on to invent the Instamatic camera as well as the world’s first digital camera in 1975.

After reaching $94.25 in February 1997, the world’s largest photography company has lost almost all its value as Canon Inc. and Nikon Corp. began making digital cameras that replaced those using film and Apple and Samsung started selling phones capable of taking pictures. The stock ended at $2.14 yesterday.

Since Antonio Perez became Kodak’s chief executive officer in 2005, sales have declined every year as the company reported a total of $2.5 billion in losses, data compiled by Bloomberg show. Now, Perez is turning to Kodak’s patents to help shareholders recoup some of their money.

‘Missed the Boat’

The company said in a statement last month it’s exploring “strategic alternatives” for the more than 1,100 digital- imaging patents it owns, including those for processing, editing and storing digital images. The patents represent 10 percent of Kodak’s U.S. total, it said.

Kodak “missed the boat with the transition to digital, but they do have some valuable assets” with the patents, Walter Todd, who helps manage $950 million at Greenwood Capital in Greenwood, South Carolina, said in a telephone interview. “This whole patent area has become really hot.”

With wireless technologies becoming more complex and smartphone sales forecast to double by 2015, patents have gotten increasingly valuable as handset makers try to gain leverage to protect themselves against allegations of infringement.

Google agreed to buy Motorola Mobility for $40 a share, or 73 percent more than the Libertyville, Illinois-based company’s 20-day trading average, data compiled by Bloomberg show. That’s the highest premium for a wireless-equipment takeover greater than $500 million since 1999, the data show.

Competitive Advantage

The company sought out Motorola Mobility after getting outbid for Nortel Networks’ patents in June. Six companies led by Cupertino, California-based Apple paid $4.5 billion.

The auction ended after 19 rounds with a final price that was five times more than the $900 million that Mountain View, California-based Google agreed to pay before the process began.

Google makes the Android mobile-phone platform, which was the best-selling smartphone operating system last quarter with a more than 40 percent share, according to Gartner Inc., the Stamford, Connecticut-based research firm.

“You cannot go to market today with a mobile device that doesn’t have the ability to capture an image and transport it” and Kodak has the patents, Mark Kaufman, an analyst at Rafferty in New York, said in a telephone interview. “If you were to be an acquirer of this, think about what your leverage may be against those other manufacturers out there using the Android.”

Patent Value

Kodak’s digital-imaging patents would command as much as $3 billion, or more than $10 a share, according to MDB Capital’s Marlett. Kodak had a market capitalization of $576 million yesterday, data compiled by Bloomberg show.

The patents may include one that protects image-preview technology used in cameras, he said. Kodak has claimed Apple and Waterloo, Ontario-based Research In Motion Ltd. infringed its intellectual property, or so-called IP, and is trying to extract $1 billion in licensing fees.

Apple and RIM denied the claim. The dispute will be decided by the U.S. International Trade Commission this month.

Kodak also adopted a shareholder-rights plan Aug. 1 to protect against unwanted takeovers. The move shows Kodak is concerned an acquirer could buy the company for “much cheaper than you could buy the patents,” said MDB Capital’s Marlett.

“There are some pretty crucial patents here, and there are a lot of people who should be very interested in buying these,” he said. “The auction for the sale of these patents is going to underscore that there’s a big disconnect between the value of the IP and the value of the stock.”

‘Dead Man Walking’

At least four Wall Street analysts disagree and recommend selling Kodak, according to data compiled by Bloomberg. Three say the company is worth no more than $2 a share.

Kodak’s analysts also project revenue this year will decrease to $6.3 billion, almost 40 percent less than the company generated three decades ago, data compiled by Bloomberg show. It will lose money this year and next, they estimate.

Any buyer would inherit Kodak’s U.S. and international pension plans, which were underfunded by a combined $1.21 billion at the end of 2010, data compiled by Bloomberg show.

Kodak, which failed to boost its share in digital cameras, may also struggle to compete with Hewlett-Packard Co. in printing as it tries to attract customers with lower ink prices, said James Kelleher, an analyst at Argus Research in New York.

“That business is in flux and turmoil,” Kelleher said in a telephone interview. “It’s kind of a dead-man-walking stock. There’s not a good prognosis for it.”

Credit Default Swaps

Derivatives traders are betting there is a more than 90 percent chance that Kodak is headed toward default, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The credit-default swaps have climbed from levels that implied a five-year default probability is up from 50 percent in December, according to data compiled by Bloomberg.

Kelleher says Kodak’s patents may not be as valuable as Nortel’s or Motorola Mobility’s because they don’t help improve the performance of mobile phones or their networks.

If Kodak’s patents can command $3 billion, acquiring the company would outweigh the liabilities, Ken Luskin, chief executive officer of Intrinsic Value Asset Management, which owns 1.7 million Kodak shares, said in a telephone interview. An acquirer would also be able to sell Kodak’s commercial and consumer printing businesses and the digital camera unit for at least $2.5 billion, he said.

Kodak Buyers

Buyers may include Microsoft, the world’s largest software maker, Samsung, the Suwon, South Korea-based maker of Galaxy phones and tablet computers, and Google, according to Luskin.

Kevin Kutz, a spokesman for Microsoft, declined to comment on whether the Redmond, Washington-based company would consider acquiring Kodak. Samsung’s Kim Titus and Aaron Zamost at Google didn’t respond to e-mails or telephone calls seeking comment.

Kodak’s “viability on a go-forward basis may be not only challenged but hard to defend,” Keith Wirtz, Cincinnati-based chief investment officer at Fifth Third Asset Management, which oversees $16.7 billion, said in a telephone interview. “They do have values embedded in patents and other technologies. Someone is going to buy the company and tear it apart.”

--With assistance from Joseph Ciolli and Mary Childs in New York and Chris Burritt in Greensboro, North Carolina. Editors: Michael Tsang, Sarah Rabil.

To contact the reporters on this story: Danielle Kucera in New York at dkucera6@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.


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