Jan 9, 2012
Last week’s Wall Street Journal article contends that Kodak is teetering on the brink of bankruptcy. Kodak would not comment on what it considers rumors,Â and that’s fairÂ given that the Journal’s story was based on unnamed sources, but last fall under similar circumstances Kodak put out a press release denying any intention to declare bankruptcy. This time around the rumors are looking like a distinct possibility.
The Wall Street Journal article focuses on Kodak’s inability to sell off some of its intellectual property (IP). Kodak was banking on making such a sale (or sales) last time I wrote on this topic and so far nothing has progressed to the point of an actual IP sale. Kodak also has been generating additional capital and shedding costs by selling off what it considers its non-core assets, including its image sensor business and Eastman Gelatine. There has also been talk that Kodak Gallery, its on-line photo service, is for sale.
There was hope that Kodak’s fourth quarter numbers would show some reason for optimism. We won’t hear anything from Kodak on its fourth quarter financials until later this month (Thursday January 26th to be exact), but given all the negative news and recent senior management and board departures I’m not hopeful. If Kodak’s Q4 picture was looking positive I’m sure that Kodak would be doing more to fight the renewed bankruptcy rumors (as it did in September).
Kodak’s stock price briefly dropped under a dollar last fall and then rebounded after the ‘no bankruptcy plans’ press release. Then in December it dipped under a dollar again and early this month it was given a warning that the stock price needs to rise above a dollar or else it will be delisted from the New York Stock Exchange. Looking at the two-year history of Kodak’s stock price shows a depressing downward slide. In April of 2010 the stock reached a peak of around $8 and even as recently as August it was above $3. Today it’s under forty cents per share.
So what happens if Kodak does file for bankruptcy? Kodak could shut down unprofitable businesses, write-off much of its debt, negotiate an infusion of capital, and start anew. Yet it may not be that simple. With the delay in selling its IP as planned, a likely scenario now is that possible IP buyers will wait for those assets to be auctioned off during the bankruptcy period. An IP asset sale would help determine Kodak’s cash position and ability to fund future operations.
Another possibility is that various business units will be sold off with Kodak re-emerging as a much smaller and focused company. Which business units might be offered for sale and who would be likely to acquire them? For a good perspective on this it makes sense to look at the key pieces of Kodak separately. Kodak has two main business areas: consumer and commercial. The consumer business sells digital and video cameras, digital frames, inkjet printers, photo kiosks, and on-line print services. The commercial group is mainly businesses associated with graphic communication in production environments. I’ll focus on the commercial side of Kodak’s business because that’s what I know best:
- Printing plates — Printing plates make up about 50% of Kodak’s commercial business. This is a large business, but it’s not poised for growth. Still, this business could be an attractive purchase for a large chemical company or a group of investors able to manage this asset to its highest profitability. Another possibility would be a company with influence in regions outside of North America and Western Europe. Plate sales in some regions do present much better growth opportunities than in developed markets. China comes to mind.
- Inkjet — Kodak’s Dayton operation has the potential to provide the highest future growth and the company has some very impressive technology in this area including its Prosper and Versamark product lines. Two companies would be well advised to consider acquiring this component. One potential buyer is Xerox, which is just beginning to become active in the production inkjet area and could take a huge step forward with the purchase of this part of Kodak’s business. I’m sure some will doubt the likelihood of Xerox acquiring a piece of its long-time rival, but it is a good match. Another potential buyer is Konica Minolta, which could benefit not only from Kodak inkjet technology, but also from some of its electrophotographic assets (see below).
- Electrophotography — Kodak’s Digimaster and NexPress production digital printing lines are solid and, particularly in the case of NexPress, provide some opportunity for growth. Companies like Konica Minolta and Ricoh have partnered with Kodak in the past and both could be potential buyers of this part of Kodak’s business.
- Digital front ends, computer to plate, proofing, and workflow — Kodak has a lot in this area, including its Creo division whose Prinergy workflow software is widely used in commercial print environments. This is another subcomponent that could be attractive to a group of investors, or potentially even to Electronics for Imaging (EFI), which has made similar purchases in the past. This group has close ties to the plate business because of Kodak’s computer-to-plate products. It thereforeÂ may be difficult to separate the computer-to-plate and workflow businesses entirely from the sales of Kodak printing plates.
- Other — Other pieces of Kodak’s commercial business include production scanners, retail photo products, motion picture film, and professional photo products. These relate less directly to the graphic arts side of the business, which is my focus, so I will leave the speculation on potential buyers to others for now.
I hope that this last section underscores the significant value that resides in Kodak’s commercial businesses. Even were the company to declare bankruptcy, many of these productsÂ would live on. The question that is likely to be resolved sometime later this year is whether that future will be under a Kodak brand or perhaps instead as part of the businesses of one or more other corporations.
I will be speaking at Kodak’s Graphic Users Association (GUA) conference next week and the fact that theÂ timing of the conference aligns with the breaking news about a potential bankruptcy announcement will make this an interesting event for sure.
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