Kodak Sells Patents to Intellectual Ventures, RPX for $525 Million

Eastman Kodak Company, the once mighty technology juggernaut that has fallen on hard times and found itself fighting to get out of bankruptcy, has completed a series of agreements that successfully monetizes its digital imaging patents. Under the agreements, Kodak will receive approximately $525 million, a portion of which will be paid by 12 intellectual property licensees organized by Intellectual Ventures and RPX Corporation, with each licensee receiving rights with respect to the digital imaging patent portfolio and certain other Kodak patents. Another portion will be paid by Intellectual Ventures, which is acquiring the digital imaging patent portfolio subject to these new licenses, as well as previously existing licenses.

Giant patent aggregators like Intellectual Ventures and RPX being involved will certainly make people stand up and notice, and perhaps also make them wish that they have entered the bidding.

The proposed transaction, which achieves one of Kodak’s key restructuring objectives, follows other recent major accomplishments that include an agreement for interim and exit financing for the company’s emergence from its Chapter 11 restructuring, and resolution of U.S. retiree non-pension benefits liabilities. Kodak’s monetization of IP assets further builds on its momentum toward a successful emergence in the first half of 2013.

“This monetization of patents is another major milestone toward successful emergence,” Antonio M. Perez, Chairman and Chief Executive Officer, said. “Our progress has accelerated over the past several weeks as we prepare to emerge as a strong, sustainable company. This proposed transaction enables Kodak to repay a substantial amount of our initial DIP loan, satisfy a key condition for our new financing facility, and position our Commercial Imaging business for further growth and success.”

[Patent-Litigation]

Just five weeks ago Kodak announced that it had secured financing totaling $793 million in Junior Debtor-in-Possession Financing with Centerbridge Partners, L.P., GSO Capital Partners LP, UBS and JPMorgan Chase & Co. See Kodak Secures Bankruptcy Financing. The financing commitment Kodak received is composed of new term loans of $476 million, as well as term loans of $317 million issued in a dollar-for-dollar exchange for amounts outstanding under the company’s pre-petition second lien notes. The financing, however, is predicated on certain conditions and Kodak’s achievement of certain milestones. The main pre-condition was that Kodak had to successfully complete the sale of it’s digital imaging patent portfolio and the sale much fetch no less than $500 million.

This deal for $525 million satisfies the financing precondition, although it is for far less than what Kodak had initially hoped to receive. Some experts had initially estimated that the portfolio might be sold for somewhere between $2 billion to $3 billion, but others thought that given the rather unrealistic pricing of some of the previous portfolios to hit the open market (think Motorola and Nortel Networks) that the price Kodak could fetch would be substantially higher. It became relatively clear early on that was not going to happen.

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. 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 suggested early on that there was far less interest in the patent portfolio than thought. See Kodak Moves to Sell Without Minimum Bid.  And then in August, when the sale of the portfolio was to be finalized by the bankruptcy court, Kodak announced they had no plans to sell the portfolio, suggesting that a suitable bid never materialized. See Kodak: No Decision on Patent Sale.

Regardless of the past problems associated with Kodak being driven into bankruptcy by bad business decisions, and the lackluster market for its patent portfolio, this $525 million deal will provide Kodak a way forward.  The company says it will allow it to continue innovating in its core Commercial Imaging technologies, which it deems fundamental to its future. The company believes it has significant competitive advantages and strong growth prospects in the Commercial Imaging business, which is what made the patents sold palatable to lose. Kodak has always said the patents sold were non-core patents.

The transaction also includes an agreement to settle current patent-related litigation between the participants and Kodak, which avoids additional litigation costs and helps to ensure that management and the company’s resources focus on enhancing the operations of its core future businesses.

The proposed transaction is subject to the approval of the Bankruptcy Court. While I don’t expect that to be a stumbling block, bankruptcy proceedings can sometimes be somewhat unpredictable. Stay tuned.