Bloomberg is reporting that Kodak’s lenders have written to the company’s board reminding its members of their “fiduciary duty to sell its patent portfolio for fair market value”. Failure to do so, the report states, could see the lenders take legal action. “The lender group, led by Avenue Capital Group and Brigade Capital Management LLC, holds some of the $750 million in second-lien debt backed by assets including the patent portfolio,” Bloomberg states.

As of last night (26th October), Kodak’s market capitalisation was just under $331 million, while its enterprise value stood at $826.93 million. Some have calculated that the patents which Kodak put up for sale in July could fetch as much as $3 billion.

What the lenders seem to be pushing for is a bankruptcy filing because they feel that is the best way to maximise the value of the patent assets the company owns. Clearly, they are looking at what happened in the Nortel case as their marker. And it is true that the Nortel auction being conducted within the context of a bankruptcy almost certainly contributed to the $4.5 billion the sale raised. The transparency of the process meant that everyone knew who was bidding and how much they had bid, while a deadline set in stone meant it was a now or never situation. However, there were also other very important factors that came into play: the technologies the patents covered; the markets in which they were applicable; the lack of encumbrances and so on. As Kasim Alfalahi, chief IP officer at Ericsson, observed at the recent LES meeting, it was the patents themselves rather than the process that principally drove the final price.

The letter sent by the lenders does not seem to have been made public as far as I can see, so it is not possible to tell whether they define what they mean by “fair market value”. But if they are thinking in terms of the $3 billion that I mentioned above, they may be disappointed. Nobody I have spoken to about the sale -who could express an opinion on it - believes that the Kodak patents will fetch close to that amount (though to be fair, no-one thought that the Nortel portfolio would raise close to $4.5 billion either). Some of the reasons for the scepticism were set out recently in a report produced by M-CAM:

… significant quality considerations have been identified in Kodak’s digital imaging patent portfolio. Any prospective bidder or financier would need to secure far greater specificity and clarity around the commercial options derived from the portfolio prior to estimating appropriate value and its associated cost of enforcement. The common bidding price being circulated for Kodak’s digital imaging patents is currently $3 billion for over 1,000 patents, 31% of which have impairment issues. The cost of procuring patents of dubious quality will be an ongoing and potentially unnecessary liability to any bidding company and its shareholders.

You also need to throw in the fact that the Nortel auction has now occurred, the patents may not be as relevant to the smartphone market, Google is now in the process of acquiring Motorola Mobility, Microsoft has licensing deals with more than 50% of Android manufacturers selling in the US and so on. Doing all that may lead you to conclude that the specifics driving the Nortel sale just are not there for Kodak, and neither is the timing.

What we don’t know is what Kodak itself has told its lenders in the past about the portfolio, though we do know that back in August CEO Antonio Perez was talking about getting “a good conclusion” to its sale. If the lenders, who are being advised by Akin Gump, have just listened to optimistic forecasts from the company and looked at the Nortel results, they could end up being very disappointed. It would be interesting to find out whether they have received advice from anyone with specific patent analytic and valuation skills. Nobody should be getting involved in this marketplace without doing that. Perhaps this is the most fundamental lesson that mainstream investors, and company boards for that matter, need to learn.

Sectors

IP litigation, Patents, IP business, IP finance, IP valuation