On July 21, 2011, Kodak announced that it had engaged. Over the past 12 months, Kodak’s financial advisor, Lazard Frères & Co. LLC (“Lazard”), brought in to advise Kodak regarding strategic alternatives in relation to the Digital Imaging Patent Assets, conducted an extensive marketing process for these patent assets, but to no avail. As Lazard marketed various patent assets, Kodak continued with its patent licensing program and strategic litigation. However, as Kodak’s financial condition deteriorated, a sale process, as well as new licensing transactions, became more difficult to pursue and consummate.
Ultimately, on January 19, 2012, Eastman Kodak Company, the once mighty technology company where the first digital camera was invented, filed a voluntary petition for chapter 11 bankruptcy in the United States Bankruptcy Court for the Southern District of New York. At the time Kodak filed for bankruptcy protection the company explained that the reorganization of the business in bankruptcy was is intended to bolster liquidity in the U.S. and abroad, monetize non-strategic intellectual property and enable the company to focus on its most valuable business lines. The time has now come for Kodak to attempt to shed its non-strategic patents with the sale of roughly 10% of the overall Kodak patent portfolio. Without an acceptable initial bid already in place Kodak will roll the dice and angle for an auction that would take place in early August 2012, assuming more than one bidder emerges.
In the latest quarterly statement filed with the Security and Exchange Commission on May 3, 2012, Kodak explained that “under the terms of the DIP Credit Agreement the Company must file a motion with the Bankruptcy Court to approve bid procedures relating to a sale of all, or sustainably all of, the Company’s digital imaging patent portfolio by June 30, 2012.” This request to seek permission to sell a portion of the Kodak patent portfolio was filed yesterday. On June 11, 2012, Kodak Kodak filed a motion seeking approval of expedited bidding procedures for a bankruptcy auction of its Digital Capture and Kodak Imaging Systems and Services (KISS) Patent Portfolios, comprising more than 1,100 patents that are integral to the capture, manipulation, and sharing of digital images.
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The motion to sell the Kodak patents explains:
Since the commencement of these chapter 11 cases, the Debtors and their advisors, together with their key creditor constituencies, have worked to stabilize the Debtors’ domestic and worldwide operations. Having stabilized operations, the Debtors are in the midst of preparing their post-emergence business plan, and considering alternatives for financing their emergence from chapter 11. A sale of the Debtor’s patents, patent applications and other assets… is a likely source of that financing.”
The Kodak motion goes on to explain that the procedures requested are as a result of the lack of a suitable “stalking horse bidder.” A “stalking horse bid” is an initial bid on a bankruptcy company’s assets from an interested buyer chosen by the bankrupt company. The bankrupt company essentially seeks out a first bid in an effort to avoid low bids on distressed company assets. Once a stalking horse bidder has made an initial bid than others bidders may enter and submit competitive bids for the assets being sold. The fact that there was no stalking horse bid acceptable to Kodak either suggests that there is far less interest in the patent portfolio being sold or that Kodak is looking for the bidding to start out exceptionally high. Given the high profile patent portfolio sales over the past several years either could be a likely explanation.
Timothy M. Lynch, Kodak Vice President and Chief Intellectual Property Officer, noted that the patents being sold have different characteristics and may interest different buyers. The Digital Capture Portfolio includes over 700 patents, covering key aspects of image capture, processing, and transmission technologies that are crucial to the design and operation of digital cameras and multi-function devices, including camera-enabled smartphones and tablets.
The Kodak Imaging Systems and Services Portfolio includes over 400 patents that cover technologies including image analysis, manipulation and tagging, and network-based services, including image storage, access, and fulfillment. Since 2001, Kodak has generated more than $3 billion from licensing its digital imaging portfolio to industry leaders, including Samsung, LG, Motorola, and Nokia, and is currently pursuing patent litigation against infringers that include Apple, RIM, and HTC.
Kodak’s motion outlines a sale process that is open to all qualified bidders subject to the rules of the bidding procedures. No disclosure of the unsuccessful bidders will be made to other bidders or the public. Only the winning bidder and the amount of the successful bid will be announced publicly at the end of the auction. To date, 20 parties have signed confidentiality agreements and have been provided access to an electronic data room.
“The proposed structure of the auction is tailored to the special nature of the assets,” said Lynch. “The bidding procedures are designed to allow bidders to give us their best offers without fear of showing their cards to competitors. In filing these proposed procedures in advance of the June 30 deadline in our lending agreement, we are moving ahead as quickly as possible with the process of monetizing our digital imaging patent portfolio.”
The Bidding Procedures set forth in Kodak’s motion with the Bankruptcy Court explain that they will facilitate potential bidders as they conduct their respective due diligence investigations and up until 5:00 p.m., Eastern Time, on July 30, 2012, the deadline for receiving bids. The proposed timeline for this sale of patents and pending patent applications is as follows:
July 16, 2012 at 5:00pm ET – Deadline for submission of preliminary bid documents, including a signed confidentiality agreement and preliminary proof of financial capacity to close the sale.
July 30, 2012 at 5:00pm ET – Bid deadline. A potential bidder who desires to make a bid must deliver a bid that satisfies all bid requirements so as to be received Kodak’s attorneys, Lazard and reviewing creditors.
August 2, 2012 at 5:00pm ET – Date by which potential bidders will be names as qualified bidders. Each bidder submitting timely and acceptable preliminary documents will be qualified as a potential bidder.
August 8, 2012 at 10:30am ET – Auction. In the event that Kodak receives more than one qualified bid an auction may be conducted upon notice to all qualified bidders. Notwithstanding, at any time after the bid deadline and with the consultation of reviewing creditors, Kodak would have the right to enter into exclusive negotiations with a qualified bidder without prior notice to any other qualified bidder if in Kodak’s business judgment it is determined that such an exclusive negotiation would be in the best interest of the bankruptcy estate and creditors.
August 13, 2012 at 5:00pm ET – Final date for designation of successful bid. Kodak in consultation with their reviewing creditors have the discretion to determine which bid or combination of bids is the highest or best bid for all or any portion of the patent portfolio being sold. Kodak would not be under any obligation to identify a successful bidder, and may designate separate successful bidders for separate portions of the patent portfolio being sold.
August 20, 2012 – Anticipated date for final sale hearing with Bankruptcy Court
According to the 10-Q filed on May 3, 23012, “all net cash proceeds from any sale in respect of the Company’s digital imaging patent portfolio must be used to prepay the DIP Credit Agreement.” At the time Kodak announced its bankruptcy filing it was announced that the company had obtained a fully-committed, $950 million debtor-in-possession credit facility with an 18? month maturity from Citigroup to enhance liquidity and working capital.
Kodak expects the motion to approve bidding procedures to be heard by the Court on July 2, 2012.