Friday, September 18, 2009

About The Kodak-KKR Financing Deal

I read of the Kodak-KKR financing deal yesterday with mixed feelings. It wasn't until today, reading another, more analytical piece in the Wall Street Journal, that I settled on a final opinion of the matter.

It seems to me that Kodak's CEO and senior management are probably guilty of some poor corporate governance behavior.

In retrospect, the Journal's Thursday edition headline, "Kodak Gets Financial Lifesaver from KKR," should have immediately tipped me off. Yet another management team of a publicly-held company enriches lenders at the expense of its own shareholders.

The way the deal is structured, KKR comes out much like Warren Buffett in his GE financing deal. KKR gets a 10% rate on its loan of up to $700MM, warrants that are already in the money, and senior status to all other Kodak debt.

The article, and this morning's analysis, note that KKR has, predictably, feathered its nest on both the upside and downside. They get a hard 10% income stream and the best protection available on the balance sheet. If Kodak miraculously improves its condition, KKR then gets to convert warrants to own up to 20% of the company.

You have to ask, as I did this morning, reading that second piece, out of whose hide do these generous terms come?

Why, the Kodak shareholders', of course. And I didn't notice any changes in management compensation. You know, like tying bonuses or large parts of salaries to Kodak's total return.

No, the management is basically rolling the dice with their owners' money, after having pissed away so much of it over the past five years, as I noted in this recent post.
Schumpeterian dynamics, as I noted in that post, have gutted this company's ability to function in a manner that would deliver its shareholders consistently superior total returns.
What does management do? Does it explore avenues to reap gains on sale of assets to those who could more profitably use them? Or at least stem the losses? No.
Instead, they are doubling down with borrowed money. Expensively-borrowed money, at that. Paying 10% in an era of 0% Fed funds.
Am I the only person who wonders why those choosing to remain as shareholders in this hapless has-been aren't suing to block the KKR deal?
As for me, I simply don't own this pig.


Anonymous said...

It was a very desparate move. I am a shareholder and have written the board with no responses about the high compensation of Mr. Perez. I had the pleasure of writinng Mr Kravis this last weekend with he same observation. the results have been horrible, why is the compensation so high?

C Neul said...

Probably because the board retained a compensation consultant who studied comparables for similarly-sized companies and advised paying the non-performing CEO Perez $1.1M in cash per year.

My own advice to you? Sell the equity.