Eastman Kodak Company (NYSE: EK) is a company that is in trouble. Maybe that should read “is, has been, and will continue to be” in trouble. For all practical purposes, it might not have a real future and to call this a turnaround situation would be about as optimistic as a senior citizen wondering when the next sighting of Halley’s Comet will be. The company may have protected its losses for its accounting and tax purposes, but the move effectively screws shareholder ambition of any buyers who might be considering that this company would be better off being private as the only logical way out.
The news today is that Eastman Kodak has adopted a Net Operating Loss Shareholder Rights Agreement that is designed to preserve its substantial tax assets. In short, its loss carry-forward assets get locked up. The problem is that this shareholder rights plan is effectively a poison-pill provision that is aimed to prevent a change of control in the company.
At the end of 2010 the value of Kodak’s net operating losses and tax credit carry-forwards of about $2.9 billion before taxes. That sounds great for a company worth under $650 million in market capitalization. Doesn’t it? Kodak can utilize these tax attributes in certain circumstances to offset future U.S. taxable income that includes gains that may come from the exploring strategic alternatives effort regarding its digital imaging patent portfolios.
Kodak hired the firm of Wachtell, Lipton, Rosen & Katz as its legal counsel and it hired Lazard LLC as financial advisor. The company did bother to note that this preferred share purchase rights will not affect Kodak’s reported earnings per share and is not taxable to Kodak or its stockholders. Why it even bothered to mention this is not of any concern. We have recently covered the company wondering if it can even survive much beyond 2012.
The problem is a complex yet simple one… Kodak is assuming it will have patents again. There is no assurance whatsoever that the digital imaging patents will generate any real income. Kodak has been successful in patent aspirations before and it has been able to use those patent royalties to fund its move into printing and elsewhere. The problem is that companies may choose to fight Kodak to the end of time over any patents now that there may be some holes in other patent enforcement measures. Our take is that this is more or less a scenario of mirage versus reality.
Kodak has a long history of disappointment. Much of the fault is not of current management, but a slower lead time into digital photography, printing, and more has been the final straw. It is obvious that management here is not going to be able to fix the problem. We previously listed Antonio Perez as a CEO that needs to be let go. He is one of the few who has managed to hang on, and our take is that the reason is only because the company faces clear challenges to its business model that will be present if a new CEO comes in or not.
A “change of control” was called an “ownership change” by Kodak, and this pertains to an IRS ruling that would be triggered if Kodak’s holders owning 5% or more were to collectively double their ownership in Kodak over a three-year term that the NOL Rights Agreement is in effect.
Kodak did say that its board of directors has determined to review the plan periodically in light of developments at the company, which it says is “including in connection with the use and value of the NOLs and the status of the patent portfolio strategic initiative.”
The end result is that Kodak has declared a non-taxable dividend of one preferred share purchase right for each outstanding share of its common stock that will be distributed to its shareholders of record as of August 11, 2011. The catch is that these would only be activated if triggered by the Rights Agreement.
As the new program goes, if any person or outside group acquires 4.9% or more of the outstanding shares of common stock, a significant dilution is triggered under the poison-pill (or Rights Agreement). Holders who already own 4.9% or higher of the common shares will not trigger the preferred share purchase rights unless they acquire additional shares.
So, we have gone on and on about this rights offering being a poison-pill provision. About all that shareholders today can hope for is that a buyer would come along. What today’s effort does is kill any hope that Kodak could find another KKR-type of investment that was taken in 2009. Realistically, it is hard to imagine that another financier would even bother stepping forward as this point. Kodak’s stock was above $6.00 back then and shares are at $2.36 today with a 52-week trading range of $2.20 to $5.95.
Last year we awarded Kodak as being one of the brands that lost the most in the last decade. The good news is that the honor cannot be repeated over the next decade. That is a sad situation, because the brand just isn’t worth enough anymore to even be counted in the years ahead. There is one positive aspect for Kodak’s legacy film business: if the earth’s poles ever do flip in our lifetime, the company will be able to show how no one would have lost their photos had they used standard film.
Before you think that 24/7 Wall St. is being too tough on a battered company, why don’t you go look at the NYSE short interest data. The short interest has grown for seven consecutive reporting periods which now come twice a month. The short interest is now a whopping 73.6 million shares.
Eastman Kodak did not do its investors any favors today even if Mr. Perez thinks differently. We are not even positive that this company can return to significant profitable levels for loss carry-forwards to even matter. The company looks more and more as though it is in what Star Trek fans would call the Kobayashi Maru.
JON C. OGG