Kodak's Fate: Will Asset Sales Be Enough?

NEW YORK ( TheStreet) --- Eastman Kodak's ( EK) effort to avert a cash shortfall and potential bankruptcy could depend on how much its asset sales bring in.

In earnings last Thursday, the company said it expects to raise as much as $550 million in asset sales and patent licenses by year-end, and is also looking for $500 million in financing.

It's a signal that the 131-year old camera pioneer's survival in 2012 may require more than just patent and business line sales.

Kodak said Tuesday that it has sold its Image Sensor Solutions business to private-equity fund Platinum Equity for an undisclosed price. The news of the deal follows the company's earnings announcement Thursday in which it highlighted asset sales a way to survive a widening loss and cash burn -- along with new financing arrangements.

For Kodak, which has seen cash fall to $862 million in its quarter ended in Sept. 30 from $1.4 billion at that time in 2010, sales of businesses and patents in addition to intellectual property litigation are its best hope from running out of cash in a year's time. However, even after today's deal, which Kodak didn't disclose a price, it's unclear how much progress the Rochester, N.Y.-based company has made on the cash-raising front. New financing arrangements may be a fallback.

In a note after Kodak's third-quarter earnings were released, Moody's analyst Richard Lane wrote that while the company has finished its cash burn for the year, it needs to urgently raise funds to weather the first half of 2012.

Lane wrote of Kodak's capital position that "without material cash inflows over the near term from intellectual property sales or licensing agreements, or the additional secured funding that the company is currently exploring, the probability of a debt restructuring mount." He added, "Absent material funding or patent sale proceeds, our analysis shows Kodak running out of domestic liquidity between the second and third quarter of 2012."

Of the deal, Kodak said that the sale is part of a strategy to become a profitable digital company by selling assets to generate cash for the transformation in a press release announcing the deal.

"This sale maximizes shareholder value by obtaining a full and fair valuation for this business, and allows Kodak to increase its financial flexibility," said Pradeep Jotwani a SVP at Kodak.

Kodak shares were up 2 cents to $1.21 shortly before noon and have fallen nearly 80% year to date.

In previous quarters, Kodak said it would look to raise as much as $600 million in cash by the end of the year to shore up its financial strength through sales of its 1,100-strong patent portfolio and ongoing intellectual property litigation with companies such as Apple ( AAPL) and Research In Motion ( RIMM).

On Thursday's third-quarter call with analysts, Perez said the company expected to end the year with $1.4 billion in cash and noted that asset sales have closed since the start of the quarter, which he said, "will contribute in the aggregate about $120 million to our fourth-quarter cash generation. We expect to complete additional transactions in the next two months and it is usual that these transactions tend to be completed in the fourth quarter every year."

Kodak's sale of its ISS division may be one of the deals Perez referenced in his call, with more to come. Previously, Kodak targeted finishing 2011 with as much as $1.7 billion in cash.

Overall, Kodak's third quarter signaled that its earnings are declining faster than it can engage in sales or litigation to raise much needed capital. Kodak reported earnings that showed its cash fell nearly 10% to $862 million, its loss widened to $222 million or 83 cents a share, missing analyst estimates surveyed by Bloomberg.

The company has reported quarterly losses of over $100 million since this point last year.

Kodak also guided investors to expect increasing losses as high as $400 million for 2011, more than doubling its expectations for losses from continuing operations before interest and taxes. It also tempered annual revenue expectations to be as little as $6.4 billion this year.

In 2010, overall sales fell 5.5% to $7.1 billion. Sales fell over 20% in its films division that recorded $1.7 billion in revenue -- sales also fell in its $2.7 billion selling graphics division. When compared with the year before, Kodak only grew sales in its $2.7 billion earning digital imaging division.

For the rest of 2011, Eastman Kodak continues to expect to sell between $250 million and $350 in intellectual property licenses and another $200 million from other assets. On Thursday's third-quarter call with analysts, CEO Perez noted that asset sales have closed since the start of the quarter, which he said, "will contribute in the aggregate about $120 million to our fourth-quarter cash generation."

Kodak previously said it could sell 10% of its overall patent portfolio for what analysts estimate may be worth more than $1 billion after deals earlier this year like Google's ( GOOG) acquisition of Motorola Mobility Holdings ( MMI), for its trove of patents and Nortel's $4.5 billion sale of patents and intellectual property in July to a consortium of tech giants including Apple and Research In Motion signal strong demand.

Kodak is also litigating some of its digital patents. Perez said in July that "we remain confident that the patents being litigated will be found to be valid and infringed."

On Sept. 23, the 131-year-old company said it drew $160 million of its credit line, causing shares to fall sharply. Moody's, in its cut of Kodak ratings a notch to Caa2 said on Sept. 27 that, "The timing or amount, if any, of cash received from IP licensing negotiations, litigation (notable with Apple and Research In Motion), or outright sales (the company is currently looking to sell 10% of its digital patent portfolio) is speculative to predict or quantify."

It also added that further cuts could come if losses persisted or cash balances fell below $800 million. In September, Bloomberg reported that Kodak hired law firm Jones Day and investment bank Lazard to provide advice on asset sales and restructuring possibilities -- its stock also plummeted to 54 cents a share during the quarter as bankruptcy rumors circled.

After Tuesday's ISS sale announcement, it's still unclear how much progress Kodak has made in its asset sale or cash projections for 2011. Even less clear is whether Kodak can find the cash to make it to September 2012. If not, financing may a second best option. Of the financing arrangement announcement, Lane wrote, "While $500 million would boost near-term liquidity, the additional secured funding is negative for existing creditors as it piles on more senior debt obligations while Kodak's picture becomes still murkier."

-- Written by Antoine Gara in New York

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