Well the bankruptcies keep coming with the latest rumored to be Kodak. It doesn't take a rocket scientist to realize that I am not buying film for my iphone (4gs has a sweet camera by the way).
I am hoping to start a discussion around the value of the remaining equity, which today trades at $120MM, just a fraction of the once $9Bn market cap. In 2010 the company generated $7Bn top line, $731MM of EBITDA and had aprx $1.3Bn in debt. For run-rate 3Q11 the company generated $312MM of EBITDA and $1.5Bn of debt (ignoring pension liabilities). Even at a measly 6x multiple the company would be worth $1.9Bn, which easily covers debt.
Given the lumpy EBITDA, and more stable revenue performance, I would have to think that careful cost management could stabilize EBITDA somewhere between $300 and $700MM, which easily throws enough cash to debt holders.
So my question to you is, why are they going bankrupt? The company is 3.00x levered using a $500MM EBITDA. I admit I would project negative growth in the coming years, but that still generates a positive equity value. I have to think that there will still be some value left over for shareholders at the end of either a reorg, recap, or spin off.
Financials are available here:
Markets are ruled by fear right now, simple as. There is no rationality.
i put in 600 bucks at 1.27 just to fuck around = no steak for me...
Back in college I worked a Kodak delivery route for the overnight film...we were all layed off when the company started to hit hard times. Everyone knew that digital cameras were putting them out of business. Their only options are to adapt and jump on the digital bandwagon or do more business overseas, and I don't know if either of those will really help.
Even if Kodak had embraced digital, would they be in great shape today?
Think about it. The handheld digital camera is slowly becoming obsolete. Most people find it inconvenient to carry two devices, and the cameras on mobile phones are pretty good in terms of quality, and excellent in terms of convenience.
The only way Kodak would have been competitive would have been to make Digital SLRs and other professional equipment. I just don't see them sustaining their blue chip status with this strategy.
Another interesting idea is if Kodak had taken a handheld digital camera, and turned that into a mobile device, say, before Apple made iPhone. In other words, they took a camera and made it easy to upload photos online, and then later added voice, email, and other features. Even if they had embraced digital, would they have embraced mobile?
Kodak seemed to committed to their original core business to embrace digital, and subsequently mobile, technology.
Not sure where you're seeing positive EBITDA in TTM financials. If you look at 9 mo ending 3Q11 they burned $500MM EBITDA, less restructuring charges. If you include required capex expenditures for the year, you're looking at at least a $650MM cash burn. Furthermore, the Company recently issued $250MM to fund working capital with expensive senior secured paper. Debt amortization shows maturity of $510MM coming due in 2012 and 2013, with $800MM of cash on the BS, it does not seem likely they would be able to fully pay off the debt, and a refinancing is highly unlikely given cash burn and falling equity value. To me this makes sense. Better go into Ch11 sooner than later especially if you know you're hemorrhaging cash. Because they have so much senior secured debt, most of which is colallaterlaizing their patents which is the primary revenue source lately, they would enver be able to sell off the patents with full bondholder support, so 363 sales in CH11 if patents will likely yield the most orderly sale. At the same time, the value of the patent assets will be unaffected by going into CH11, sure their cash flows might deteriorate further from the negative PR, but given their LTM cash hemorraghing, I don't think it will be too great. And of course they're beneffitting from the automatic stay of bankruptcy and ability for no creditor to foreclose on their assets.
The more interesting question here is what will happen to them. WIll they emerge from Ch11 as a smaller company focused on a core business, or is this really a CH11 orderly liquidation of assets and then a sale fo the business? Considering the DIP they're going for is $1B, this is looking like a protracted Ch11 so it remains to be seen. From a buy-side perspective, opportunties in distressed paper will be numerous given this Company's complex capital structure; equity is a stupid play they will get nothing.
Agree with socola's response. Quick glance at the 10-Q suggests 9m-11 EBITDA of roughly -$500mm due to;
Gross Profit - 543 SG&A - (884) R&D - (214)
This business couldn't sustain itself even if it had no debt in the cap structure, and a 20% YoY decline in top line revenues isn't exactly helping. Would make more sense to do a liquidation analysis on the business, unless you see some part of it that has economic value as a going concern which may be sold or spun off.
"Measily 6x" (A lot of companies are trading at 1-4x EBITDA.. 6x is not measily) "Ignoring pension costs" (should we just not ignore debt alltogether then.. lets throw all accounting rules out..) Even if the company had traded on "6x EBITDA", it would generate this over 6 years (discounted at 30% IRR anyone?-why did you ignore the TVM?) and judging by the size of pension costs and debt payment, all ebitda will be used to pay interest and pension costs , before even paying the underlying debt.
Understand now why they are bankrupt?
OK, who trades at 1x projected EBITDA? Also, I admit I'm playing devil's advocate here. EBITDA drives valuations, and companies that teeter on the brink of profitability have violent swings in EBITDA. The real question is, if the company was financed with 100% equity and stripped down to its most efficient cost structure, what would EBITDA look like on a go forward basis.
A little backup of a 6x multiple - assuming no growth or decline in EBITDA, a 6x multiple is a 17% return. Who wouldn't take that? I don't think there is a public acquisition out there that has gone for less than 6x projected EBITDA.
This is a great thread, by the way, thanks for starting.
Cap structure of the company is irrelevant in EBITDA valuations, the acquirer can recapitalize the BS, thus valuations are based on debt free cash flows.
6x EBITDA multiple valuation is not an intelligent comment for this Company. Look at the financials. What buyer would pay par on the debt and a premium on the equity for a company with negative EBITDA margins and uncertain economic future (hence deteriorating cash flow growth)? A better EV valuation would apply a distressed discount to either the EV or to the equity value, or simply wiping out the equity entirely and looking at the debt. See what the debt is trading at as somewhat of a proxy to recovery, and that will be the closest proxy to EV. Compare that to revenues since EBITDA is negative and you'll find the adjusted multiple this Company will likely sell for.
I did a case study in college on Kodak. Their CEO flat out rejected digital photography. He believed it was a fad, not a viable business strategy and that their would be enough high-end camera enthusiasts that preferred red-room photography to keep the business thriving. What an idiot.
any reasons for why someone would still buy into this? after all, the price does change intraday - is it just trading, even though they all know it's gonna tank?
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