Holding company bids for Kodak Health Group

By midyear, Kodak Health Group could split from Eastman Kodak and begin operating as an autonomous subsidiary of Onex Corporation, a Canadian holding company that already owns seven healthcare firms, including a chain of imaging centers.

The acquisition, announced Jan. 10, is valued at US$2.35 billion ($2.78 billion Canadian). The purchase price is based on an equity payment of US$475 million ($560 million Canadian) and the assumption of debt.

"With the kind of cash flow we generate, (this debt) is no concern for us," said Kevin J. Hobert, president of Kodak's Health Group.

Robert M. Le Blanc, the Onex managing director who led the acquisition effort, agreed, noting that the Health Group's substantial cash flow will provide the basis for accelerating R&D growth.

"It will be committed to make sure this group has a balance sheet in place that will allow it to grow," said LeBlanc, who is slated to serve as chairman of the newly acquired company. "And if they have more opportunities than they have capacity, Onex will be there to help them, as well.

Pending regulatory approval, Onex will acquire the Health Group and Kodak's nondestructive testing business, which covers industrial-grade x-ray film and digital imaging products. Aggregate revenues of the two businesses were approximately US$2.54 billion ($3 billion Canadian) for the 12 months ended Sept. 30.

The price tag is close to the current year's revenue, Hobert noted.

"We feel it is a fair price, that we got a full price for the company," said Hobert, who is expected to continue as Kodak Health Group president after it joins Onex. "This was a process we had been working at for a long time. There were a lot of interested parties and because we had significant interest throughout the process, I feel like we got fair value."

The spin-off will operate under a new name, but its products - digital x-ray and IT systems, x-ray film, dental imaging products, software, and consulting services - will bear the Kodak brand, LeBlanc said.

"With this transaction, Kodak is exiting the healthcare space," he said, clearing the way for the Onex subsidiary to use the brand.

The brand will be associated with specific trademarks unique to the Kodak Health Group, according to Hobert, such as DirectView CRs and DRs, DryView printers, and CareStream PACS and RIS.

"Those trademarks go with us," Hobert said. "We own them and will be the only company that uses them."

This will place the company in the unusual position of having a portfolio bearing a name other than that of the company. Hobert and LeBlanc will hold a competition among Health Group employees to come up with a new moniker. One will be chosen, hopefully, before the company joins the Onex fold, they said.

The equity investment will be made by Onex Partners, Onex's large-cap private equity fund. Acting as a limited partner in that fund, Onex Corporation itself is expected to contribute about US$188 million ($222 million Canadian). The acquisition agreement provides that if Onex Partners realizes an internal rate of return in excess of 25% on its investment, Kodak will receive payment equal to 25% of the excess return up to $200 million.

Onex, one of Canada's largest companies with global operations, has annual consolidated revenues of $20 billion and consolidated assets of $20 billion. Company shares trade on the Toronto Stock Exchange. It manages third-party private equity investments through the Onex Partners and ONCAP family of funds. It also manages a real estate fund and a public market fund.

"We have a lot of experience carving out subsidiaries of large public companies," LeBlanc said. An example was the purchase of SkyChefs from American Airlines.

The Health Group will function as an autonomous unit within Onex, he said, but will rely on its parent for infrastructure, such as finance and legal resources, as do other members of the corporate family.

All of Onex's healthcare subsidiaries are service providers, making the Kodak Health Group its first foray into the equipment side. Consequently, there will be none of the synergies - or overlaps - in staff or portfolios that have come to characterize mergers and acquisitions in this space over recent years. The one possible exception is the Center for Diagnostic Imaging, composed of about 35 individual freestanding imaging centers operating mostly in the Midwest.

"I would hope that these centers will be buying the Kodak machines rather than anybody else's from this day forward," LeBlanc said.

"Actually, more Kodak machines," Hobert said, noting that the imaging chain is already a customer.