The announcement of Eastman Kodak's (OTC: EKDKQ) bankruptcy filing yesterday marked what many saw as an inevitable step for the once-iconic photography giant. But if you looked up a stock quote for the company's shares last night, you saw an interesting thing: But for a scant 2,000-share trade at some point early in the day, the stock's old listing saw no trading activity yesterday.
The reason is simple: The New York Stock Exchange delisted the stock as soon as it filed for bankruptcy, and the stock now trades on the Pink Sheets. Yet despite the filing, shares still fetched $0.30 a piece at the end of the day. That raises a simple but important question: Could Kodak give investors a big payoff?
Understanding bankruptcy
The idea of profiting from distressed investments is an age-old siren song. Look back at recent bankruptcies, and you'll see that investors still hold out hope for recovery months or even years into the proceedings. AMR, for instance, still goes for $0.43 per share after the airline holding company's November bankruptcy. More than a year after its filing, shares of battered insurer Ambac Financial still bring you $0.05 a piece -- even as the company marches toward a final confirmation of its bankruptcy plan.
All too often, shareholders end up with nothing. But it can be confusing, especially when new post-bankruptcy shares come public bearing the same ticker symbol. General Motors (NYSE: GM), for instance, had its current shares start trading in late 2010, and despite the company's fresh start, the stock has performed badly in its first year of public trading. Yet the old GM continued to exist until last March, at which point the shell company exited bankruptcy and got cut up into four separate trusts for various creditors and other claimants. Those who owned the old GM stock got absolutely nothing.
In certain rare instances, companies have gotten through bankruptcy while not leaving former shareholders high and dry. General Growth Properties (NYSE: GGP) also got delisted after trading for $0.33 per share, but several investor groups ended up fighting it out for the company's assets. In the end, the original shares provided huge returns for anyone who picked them up at their depressed levels immediately before its bankruptcy filing.
The key to understanding General Growth, however, comes from looking at its bankruptcy filing. Even initially, the company claimed assets whose value exceeded its debts. It was merely a short-term cash crunch rather than a larger fundamental problem that pushed General Growth to take the bankruptcy option.
The only chance
By contrast, in Kodak's case, the odds of a big payoff for current shareholders looks slim. In its bankruptcy filing, Kodak listed $5.1 billion in assets versus $6.8 billion in debt, including a huge group of unsecured creditors who will scurry to recover any portion of their losses that they can.
The wild card, though, is the portfolio of patents that Kodak has thus far been unable to sell. One company lawyer's estimates put the value of the patents at $2.2 billion to $2.6 billion, but if a bidding war were to erupt, then it's at least theoretically possible that a higher price would wipe out the $1.7 billion shortfall between listed asset value and debt, leaving shareholders a chance of recovery.
Kodak already licensed some of its cinema-specific patents to IMAX (NYSE: IMAX) in exchange for royalties, so there's precedent for the move. But unlike Nortel's wireless and networking patents, which triggered a bidding war in mid-2011, Kodak's imaging patents have a much narrower audience. It's unclear whether Apple (Nasdaq: AAPL) and other smartphone manufacturers really need Kodak's technology in order to support the cameras they install in iPhones and other devices.
Don't go for broke
At this point, Kodak's shares are so cheap that you might think it's worth taking a flyer on a lottery victory. But even if the company makes it out of bankruptcy, today's shareholders almost certainly won't. Don't throw good money after bad -- look elsewhere for a chance to make a profitable investment.
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