October 2014

The Restructuring of Kodak: Bringing Two Well-Positioned Companies into Focus

From Eastman Kodak Company’s storied past to its struggles with market forces and Chapter 11, AlixPartners takes us inside how it played a pivotal role in restructuring and splitting apart an iconic company that stands as one of the most innovative, unusual and successful deals ever consummated in the history of cross-border insolvency.

James Mesterharm, Co-Lead, AlixPartners

James Mesterharm,

Becky Roof, Managing Director, AlixPartners

Becky Roof,
Managing Director,

The history of Eastman Kodak Company is well known to many: Founded in Rochester, NY in 1880 by George Eastman, a self-taught inventor who first developed a successful formulation for gelatin-based dry plates, the company helped pioneer the nascent field of photography. The now-iconic Kodak name was registered as a trademark in 1888, and over the course of the next 125 years, the company introduced notable products such as the Kodak Brownie camera, Kodachrome film (celebrated in a hit 1970s song by Paul Simon), the Kodak Instamatic camera and the Kodak Fun Saver one-time-use camera, as well as gold-standard motion picture film beginning in the 1920s. Kodak was also highly regarded for its research capabilities and was a prolific filer and holder of patents, conceiving many “firsts” in image capture, including the world’s first digital camera in 1976 and thousands of additional patents in various related fields. It’s no wonder that Kodak’s global employment peaked at 144,000 in 1988, and revenues exceeded $13 billion in 2003, as the brand and related trademarks were registered in 160 countries around the globe.

But the digital revolution, competition and other factors hit Kodak hard, as the world took to carrying smartphones in their pockets rather than traditional film cameras around their necks. To try to cope, Kodak in the early 2000s commenced a transformation to become a smaller company, focusing itself only on digital imaging opportunities. Operating actions, such as the sale of non-core assets and the closures of excess capacity, had reduced its workforce from approximately 64,000 employees in 2003 to approximately 17,000 at the end of 2011. Kodak also aggressively monetized its own formidable digital imaging patent portfolio through licensing arrangements, which generated over $3 billion in income and infringement settlements.

These efforts helped provide Kodak with runway to invest in promising new technologies and markets, as well as to fund an investment in consumer inkjet printing. However, this transformation also required significant investment and time to reach scale and profitability, and enormous legacy liabilities still existed from underfunded pension plans, employee healthcare commitments and environmental liabilities spread across the company’s broad manufacturing footprint. By year-end 2011, Kodak found itself facing inadequate liquidity, with annual sales of $6 billion, $4.7 billion in assets and more than $7 billion in liabilities.

Bankruptcy and Restructuring

At the time of Kodak’s bankruptcy filing in January 2012, the company operated within two primary business segments. Its consumer segment included many familiar consumer products, such as film, cameras, inkjet printers, photo paper, digital photo print kiosks and Kodak Gallery, the company’s online photo editing and printing business. Meanwhile, the company’s commercial segment included a range of business-to-business products and services, including prepress digital plates and plate setters, inkjet presses and components, laser presses, document scanners, packaging printing solutions, cinematic film, inks and specialty chemicals, aerial imaging and printed circuit board film. Approximately 60% of Kodak’s total revenue base was located outside the U.S. and a significant share of manufacturing operations was also overseas, primarily in Europe and China.

In addition, Kodak’s digital capture patent portfolio (patents relating to capturing, editing, storing and displaying digital images on smartphones) and its so-called “KISS” (Kodak imaging systems and services) patent portfolio (its online photo business) were key assets for the company, having generated licensing, royalty and other revenues in excess of $1.8 billion between 2008 and 2010 alone.

Nonetheless, by January 2012, Kodak filed for bankruptcy as a result of declining liquidity, due in part to an inability to generate even more licensing revenue out of its patent portfolio. Kodak assembled a turnaround team composed of senior management, AlixPartners (with James Mesterharm as chief restructuring officer), Lazard and Sullivan & Cromwell. Becky Roof, also of AlixPartners, joined as interim CFO in September 2012. Kodak and its advisors were clear in articulating four strategic objectives for its continued restructuring through Chapter 11:

  1. Bolster liquidity
  2. Focus on the company’s core business lines
  3. Monetize non-strategic intellectual property
  4. Fairly resolve legacy liabilities

Steps to a Turnaround

Steps the turnaround team took to contribute to these objectives included:

  • Reaching a consensual settlement agreement with the committee of U.S. retirees to permanently eliminate $1.2 billion in OPEB liabilities that hampered Kodak with annual cash costs of $110 million.
  • Completing the sale of Kodak’s digital imaging patent portfolio in a complex transaction to a consortium of buyers, including Apple, Google, Samsung and others, for $527 million.
  • Completing expanded operational restructuring and profitability-enhancement work. This resulted in an annual EBITDA improvement of more than $300 million, including the rejection or renegotiation of a large number of unprofitable contracts and leases, the wind-down of unprofitable businesses, the significant consolidation of remaining business lines, and the streamlining of corporate and R&D functions.
  • Reaching a settlement with the State of New York related to pre-petition environmental liabilities, funded with a $49 million trust.
  • Conducting a successful $406 million equity rights offering to unsecured creditors under the bankruptcy Plan of Reorganization and raising approximately $900 million in exit financing to fund remaining cash needs associated with the company’s emergence. The outcome allowed for the full repayment of the initial and refinanced debtor-in-possession financing facilities and the full repayment of remaining pre-petition second lien notes, which had traded as low as 60 cents on the dollar in 2012.

Emergence of Kodak, Kodak Alaris

Finally, there was an extraordinary, win-win settlement with Kodak’s UK Pension Plan (KPP) in April 2013. It resulted in the spin-off of Kodak’s consumer businesses, including document scanners, to the KPP in exchange for the release of all of the company’s worldwide obligations to the KPP, including the waiver of its $2.8 billion bankruptcy claim and a $325 million cash payment from the KPP to Kodak. Working together, Kodak, the KPP and their advisors1 overcame a host of seemingly insurmountable hurdles to finalize this settlement in a matter of weeks.

The first set of challenges involved obtaining court and regulatory approvals. Kodak and the KPP were operating under an extremely tight timetable, leaving no room for a months-long auction process. The parties, assisted by the Official Committee of Unsecured Creditors, convinced the U.S. bankruptcy court that Kodak’s sale to the KPP was the only viable path to bankruptcy emergence and would result in a value that could not be matched by any other potential bidder.

Next, the parties approached the UK Pensions Regulator. Under the agreement, the KPP would pay $325 million in plan assets to Kodak and receive in return businesses to own and operate to obtain recovery. The KPP secured regulatory approval by demonstrating that those businesses were stable, cash-producing assets that would generate more benefits to its pensioners than any other alternative available. But to obtain pensioner approvals, the KPP and its advisors had to undertake a town hall-style roadshow across the UK, explaining the transaction. Ultimately the plan received overwhelming pensioner support, with votes in favor representing more than 95% of the outstanding pension liabilities.

Even after the deal was approved, the parties faced a second set of challenges. To start, the KPP had never run a business before — no small issue. Therefore, Kodak and a team of advisors in 33 countries worked with the KPP to develop and execute an operations plan for the new company, now known as Kodak Alaris Holdings Ltd. (“Alaris” is a Latin word often translated as “wingman”). Equally challenging, the businesses had been fully integrated with the rest of Kodak for decades, raising a host of issues on how to separate employees, operations, finances and intellectual property.

In the end, the transaction created extraordinary value. It cleared the path for Kodak and Kodak Alaris to emerge from Chapter 11 as ongoing but separate businesses, preserved thousands of jobs and created two companies: a reorganized Kodak, owned by U.S. creditors and Kodak Alaris, owned by the KPP. It stands as one of the most innovative, unusual and successful deals ever consummated in the history of cross-border insolvency.

The Company Today

The reorganized Kodak emerged on September 3, 2013, with a right-sized capital structure and an annuity-based business model. Kodak’s operational EBITDA improved by over $375 million in 2013, and the company re-listed on the New York Stock Exchange in January 2014.

With its successful emergence from Chapter 11, Kodak is a now lean technology company focused on imaging innovation for business. That means offering products like the industry’s fastest full-color inkjet presses for commercial printing and publishing applications, software that automates the flow of work through a print shop, eye-popping ink colors, invisible imbedded inks used in anti-fraud and anti-counterfeit applications, chemical-free processing of printing plates, patented technologies for flexographic package printing, and partnerships with manufacturers to apply Kodak’s printing knowledge to functional materials, such as computer touchscreens. An iconic brand lives on — in two incarnations — to live perhaps for another century.

James Mesterharm is co-lead and Becky Roof is a managing director in the Turnaround & Restructuring Services group at AlixPartners, LLP, a global business-advisory firm (www.alixpartners.com).


1. Advisors to the KPP included Ross Trustees, Hogan Lovells and Grant Thornton.