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In the 1880s, when George Eastman was developing his fledgling film company, he wanted a name that was short, easy to pronounce and unique. Kodak, the brand that would become synonymous with photography, was born from Eastman playing anagram games with his mother and his insistence that the name start with the explosive sound of the letter k. Now, 121 years after the founding of the Rochester, New York–based Eastman Kodak Co., two key divisions of its business have emerged from the company’s 2012 bankruptcy into a new concern called Kodak Alaris, itself a made-up name meant to represent speed and agility and sound like nothing else previously in existence.

Following Eastman Kodak’s emergence from Chapter 11 bankruptcy protection in September, what remains of the iconic film and imaging company is a piecemeal collection of businesses and patent portfolios split between Kodak and Kodak Alaris. The latter is completely separate from the original Eastman Kodak and comprises its document imaging business (scanners, software and service) and its personalized imaging business (photo paper, film, single-use cameras and photo kiosks). The full owner of Kodak Alaris is yet another collective: a holding company controlled by the U.K.-based Kodak Pension Plan (KPP).

Kodak once reigned supreme in the world of photography and imaging. As of 1976, it controlled nearly 90 percent of the U.S. film market. That same year the company developed the world’s first digital camera. It rivaled the size of a toaster — although compared with the computers of the era, its construction was rather sporty. But despite having this patent in its arsenal, Kodak was reluctant to embrace digital photography during the late 1990s.

The last year Kodak turned a profit was 2007. Some five years later, having weathered the 2008–’09 financial crisis, on January 19, 2012, the company filed for bankruptcy. That August Kodak went public with its intention to sell its photo-printing kiosks, commercial scanner operations and photographic film business, with the exception of motion picture film, then valued at $650 million. In January 2013 the U.S. Bankruptcy Court for the Southern District of New York approved Kodak’s financing plan to emerge from Chapter 11 by the middle of 2013.

KPP was Kodak’s largest unsecured creditor, with $2.84 billion in defined benefit pension plan claims against the company. To help pay off its debts, Kodak sold off a portfolio of some 1,100 digital patents, expecting to reap £2 billion ($3.23 billion) for its intellectual property (IP), according to KPP trustee Andrew Bradshaw, who took part in the settlement discussions with Eastman Kodak. But instead the patents went for a fire sale price of $527 million to a group of high-profile companies that included Amazon.com, Apple, BlackBerry, Google, Microsoft and Samsung. This massive funding shortfall put in peril the retirement funds of the 16,000 members of the KPP, who, if negotiations had failed, would have seen their scheme go into administration by the Pension Protection Fund (PPF), the U.K. statutory fund charged with underwriting insolvent pensions.

To bridge the gap, the KPP in April agreed to buy Kodak’s document and personalized imaging businesses for $325 million, at which time the pension fund agreed to drop its legal claims. “It was quite clear that Eastman Kodak didn’t have $1 billion lying around,” says Bradshaw, a director of Ross Trustees, an independent company located 25 minutes west of London that provides support services to U.K. pension schemes. “But they did have two businesses, and they needed cash.” On September 3, Eastman Kodak formally emerged from bankruptcy and the KPP-owned businesses were spun off into Kodak Alaris.

For its part, Eastman Kodak’s U.K. subsidiary, Kodak Ltd., stayed solvent and maintains its own trading operations. It was the sole sponsoring employer of the KPP and thus has legal responsibility for the pension plan. But in 2007 a retainer was put in place that ensured that Eastman Kodak would have to provide funding to keep up with the U.K. pension fund’s payment plan and ensure its funding through the end of 2014. Between 2007 and 2009 the plan’s deficit widened from £281.5 million to £607.8 million, which prompted the KPP’s trustees to push the funding requirement out to 2022. Following the postbankruptcy spin-off of Kodak Alaris, the U.K. branch of Kodak is exempt from its obligations to the U.K. pension fund.

Under the Kodak Alaris–backed plan, the pension members are to receive 100 percent of the benefits to which they would have been entitled under the old Kodak scheme. Ninety-three percent of the fund’s pensioners voted to join the new scheme. They will not see their benefits capped, and pensions will rise to keep up with statutory increases. For some members, the benefits will exceed the amount that the PPF would have offered but may be less than what they would have received under the prebankruptcy Kodak Pension Plan. Since March 31, 2012, the plan has been closed to future accruals.

Kodak Alaris represents some 30 percent of the pension plan’s assets (the rest of its £1 billion portfolio is spread among bonds, equities, private equity, real estate and hedge funds). Revenues from Kodak Alaris for 2013 are projected to be $1.3 billion, according to Bradshaw. The Kodak Alaris businesses had a combined revenue in 2012 of $1.4 billion, with profits of $155 million. Profits from Kodak Alaris and the returns from KPP’s investments will be paid into a trust that in turn will remit payments as stipulated under the members’ defined benefit plans. The U.K.’s Pensions Regulator has given clearance for the new plan to launch officially in April 2014.

“The U.K. Pensions Regulator forced us to do some novel thinking,” says the fund’s lead regulatory counsel, Katie Banks, of the London office of international law firm Hogan Lovells, which advised on the fund’s claim against Eastman Kodak and on the acquisition of the businesses that became Kodak Alaris. “If we hadn’t managed to create enough value on the pension fund, we would have had a deficit of £1 billion, and we would have had to come up with an even more innovative solution.”

Kodak Alaris has a license to use the Kodak brand in perpetuity, including intellectual property rights to certain designs, trademarks, trade dress and subbrands. It will maintain business in the same 30 countries in which Eastman Kodak had operations, with some 700 of its 4,700 global employees working out of its Rochester headquarters. The remaining employees are based in key markets, including manufacturing centers in the U.K. and China and smaller-scale operations in Brazil, India and Russia, says Phillip Gibbons, Kodak Alaris group finance director. Dolores Kruchten is president of Kodak Alaris’s document imaging business; Dennis Olbrich heads up its personalized imaging business. Both executives are reprising their roles at Eastman Kodak and report to Steven Ross, KPP’s independent chairman and founder of Ross Trustees.

The spin-off of Kodak Alaris to KPP is the latest example of how intellectual property and other corporate assets can inject funding into flagging pension plans. “These sorts of pension-funding partnerships have been around for a while now in the U.K., effectively using other assets,” says John Illsley, valuation director for Intangible Business, a London-based consulting firm that specializes in the appraisal of intangible assets.

During the past decade, major U.K. supermarket chains Sainsbury’s and Waitrose have used their real estate properties to help fund their pension schemes. This type of plan funding works largely the same way as an IP-funded scheme. The assets are transferred into a special-purpose vehicle, which then effectively leases or rents the assets back to the company, generating an income stream for the pension fund. The value of the SPV represents a plan asset that can be securitized and sold by the pension fund in the event of default.

U.K.-based GKN announced in April 2010 an agreement with its pension plan trustees to use income earned from the leases on five of the aerospace and automotive engineering company’s U.K. properties, as well as from royalties generated by its intellectual property. Projections show the plan bringing in some £30 million a year over two decades — a benchmark it hit last year, according to GKN Holdings’ annual report.

TUI Travel, Europe’s largest tour operator, announced in May 2011 that it was merging four of its then six pension schemes into three defined benefit pension plans with a limited interest in a partnership that receives royalties from its Thomson and First Choice brands, which consist of package tours for European holidaymakers. The agreement was intended to cover a £431 million deficit running in the company’s pension schemes at the time. Under the partnership, the plans will receive some £16.5 million during the next 15 years to lessen their funding gap. In addition, TUI Travel has pledged up to £275 million in payments by 2026, should the pension plans still be running a deficit. “TUI really put their brands into the pension,” says Illsley, whose firm worked on the valuation for the TUI pension partnership.

Betting on a brand isn’t without risk, of course. The fate of Kodak’s U.K. pension plan is tied to some of the very same assets that put Eastman Kodak into bankruptcy almost two years ago. The question that KPP participants should be asking is, How much is Kodak Alaris’s imaging business going to be worth going forward?

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Related Topics: pensions· intellectual property· Kodak