Wednesday, September 16, 2009

Call the authorities, Kodak has been assaulted (EK)

AlphaNinja - Seriously. Eastman Kodak (EK), or at least its shareholders, have just been mugged by private equity giant Kohlberg Kravis Roberts. And EK was happy to let it happen. How a company raises money, and at what price, tells you a lot about the company's management and future prospects. This financing looks to me like KKR "romanced" management into giving away warrants that dilute current shareholders by 20%. The stock is off 4% after hours.

From the release:

KKR to Buy up to $400 Million in Senior Secured Notes Due 2017, and Warrants to Purchase up to 53 Million Shares;

ROCHESTER, N.Y.--(BUSINESS WIRE)--Sep. 16, 2009-- Eastman Kodak Company (NYSE:EK) announced today that it expects to raise up to $700 million through a series of financing transactions, including a commitment from Kohlberg Kravis Roberts & Co. L.P. (KKR) managed investment vehicles to purchase up to $400 million in Senior Secured Notes due 2017, that reinforces the company’s strategic direction and strengthens its financial position.

The money raised will be used to retire Kodak's other expensive debt. And the sweetest part of this deal for KKR are 53million warrants to purchase shares at under $5.50 per share that don't expire for EIGHT YEARS:

The warrants are exercisable any time prior to the eighth anniversary of the date of issuance at an exercise price based on a formula tied to Kodak stock price performance prior to pricing the private placement of convertible notes, but in no event will it be greater than $5.50 per share.

This is an absurd giveaway for a company with over $1.1BILLION in cash and equivalents on the balance sheet. Yes, it does remove expensive debt. Yes, the stock will likely recover and head higher eventually as operational performance improves. But this deal did NOT need to be done with such favorable terms to KKR.

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