Remember that girl from high school who was so hot and so out of your league back then that you would’ve jumped out of a plane without a parachute just to get her attention? Yeah, me neither.
But now imagine that this girl walks by you on the street and you barely recognize her. That lustrous mane of blond hair has thinned out and turned green from repeated dye jobs. The long, tan pair of legs you remember have been replaced with two gnarled and knotty sycamore trunks, latticed with spider veins, thickened from repeated exposure to the Colonel’s secret blend of 11 herbs and spices. And the face that launched one thousand parking lot fist fights? Weathered like a backyard deck.
It is not until you have experienced an encounter like this that you can truly appreciate the decline in fortunes, condition and stature of one of the greatest American companies of all-time, Eastman Kodak (EK).
Look at this horror show:
Before I continue, let me remind you that I do not make buy or sell calls on this site for any stock, so please do not take action based on what I’m about to discuss one way or the other.
This post was instigated by a story I read on The Deal‘s site about private equity deals when I came across this transaction that you may or may not have heard about:
The PIPE deal KKR struck with Eastman Kodak Co. last month, which closed Sept. 29, is a variant of (KKR’s deal with) Legg Mason, though more favorable to KKR. Technically, it wasn’t a PIPE. KKR’s $288 million injection is in secured, nonconvertible notes, a higher and safer perch than the Legg Mason notes. KKR took advantage of Kodak’s dicey financial health, exacting a 10.5% interest rate. What’s more, KKR’s equity kicker — 40 million warrants exercisable immediately at $5.50 a share and entitling KKR it to an 11% stake in Kodak — was less than 60 cents a share out of the money the day the deal closed.
George Eastman is rolling over in his grave right now. Where do we begin?
Let’s start with the 10.5% interest rate. 10.5%? When did Kodak become so desperate? The answer is that it didn’t happen overnight.
We were first told years ago about the company’s strategy to run the film business as a legacy asset in run-off while investment was made in digital photography. We figured it would be awhile before profit would ramp up to replace the end of developing negatives. ‘So what?’ went the conventional wisdom – Kodak had the prestige and the brand name to one day dominate digital, so it would be worth the wait. The deep value managers parked themselves in the stock and watched as a parade of executive losers missed every single opportunity to leverage the brand and technology into a profitable business for the digital age.
And getting into bed with KKR to the tune of 40 million warrants exersizable at 5.50 a share? Very pathetic when you consider that Kodak was a Dow component for over 70 years (1930 to 2004). The company is 130 years old and still has one of the most highly-recognized brands in the nation (although it just slipped from the top 100 this year).
I should also note that KKR couldn’t care less about the outcome here, according to the article:
Even though Kodak is ailing and some analysts have prophesied default, KKR has a solid chance of scoring a strong profit. It remains to be seen whether Kodak-style debt deals become the norm in PIPEs. What’s clear is that KKR has made a constructive contribution to the playbook.
My, how this once great company has fallen.
Now fans will say that Kodak may survive with its at-home photo printing equipment (good luck competing with HP) or its online photo sharing site (like there aren’t 20 of those) and maybe they’re right. But still, this thing is in the toilet, and since when was the mission to “survive”?
For millions and millions of Americans, the name Kodak means something. Their wedding album photos, graduation snapshots and baby pictures were taken with Kodak cameras and Kodak film.
Unlike the tragic demise of our auto manufacturers, Kodak can’t blame health care costs, they can only look inwardly and blame their own lack of imagination and innovation. They’re out to lunch in Rochester, NY.
I’d also mention that unlike Circuit City or Countrywide, two deceased companies that no one will miss because they always sucked, Kodak was special.
At its peak, Kodak employed almost 80,000 workers, mostly in America. If it does die of neglect, it will be truly sad.
So congratulations to the bankers at KKR for getting the last chunks of gristle off of the carcass. Someone’s got to be the loan shark, I suppose, even if the helpless borrower is Eastman Kodak.
For a glimpse at this once mighty company’s 130 year history, I’d suggest checking out their milestones on Kodak.com. Your mind will be blown at how deeply entrenched Kodak is in American history:
Full Disclosure: I have no positions long or short in shares of EK, please do not treat the above as advice, research or an invitation to buy or sell any securities. See my Terms & Conditions page for a full disclaimer.