Polaroid: A Sweet Deal

Bank One is set to land it for a song, but critics are crying foul

Superficially, Polaroid Corp. has all the market appeal of one of its quaint instant cameras. But as the hot tech company of the 1960s and '70s emerges from bankruptcy, it's turning out to be one of the year's best bargains, with a trove of assets that are going for cents on the dollar.

On June 28, the U.S. bankruptcy court in Delaware approved the sale of a 65% stake in Polaroid to One Equity Partners, a private equity unit of Chicago's Bank One Corp. (ONE ), for $255 million. (Unsecured creditors get 35%.) But Polaroid has more than $1 billion in assets--including real estate, art, and foreign holdings--that are either undervalued or not valued at all in filings.

The deal is a steal for OEP. Most of the price is a promise to pay off $228 million in Polaroid debts. The money will come mostly from the $215 million in cash Polaroid held at the end of May. OEP will only put in about $60 million. Shareholders get zip, and many retirees' checks will shrink when the government takes over Polaroid's pension plan.

OEP's first offer was even more self-serving: It gave unsecured creditors, whom Polaroid says it owes $887 million, a mere 5% stake. After the creditors told Judge Peter J. Walsh that Polaroid was doing better than forecast and OEP was paying peanuts, OEP raised its offer to 35%.

Still, many critics want a new auction. "The sale is a scandal," says Ulysses A. Yannas, an analyst at Buckman, Buckman & Reid Inc., who doesn't own shares. A group of retirees has asked Walsh and Mark Kenney, the U.S. bankruptcy trustee, to reopen the bidding. Kenney says he has no plans to do so. Unless Walsh reverses himself or an appeal voids the sale, OEP will be Polaroid's new owner.

OEP won't comment. But Polaroid clearly is no longer the disaster it was in October. Then, a 10-year slide in instant-film sales finally crippled the 65-year-old company's ability to pay down its $950 million in debt and it declared bankruptcy. In the five months through May 31, it earned $16.8 million before interest, taxes, depreciation, amortization, and restructuring charges.

The $714 million of assets Polaroid showed in its bankruptcy filings were only part of the story. In its final quarterly statement to the Securities & Exchange Commission last year, the company listed $1.8 billion of assets. What's the difference? Polaroid changed its accounting to list only assets with book values it could verify, eliminating foreign assets. CFO William L. Flaherty said market vagaries made it impossible to do otherwise. Judge Walsh agreed, saying prospective buyers had to decide what the assets were worth.

As a result, it takes some sleuthing to find out what Polaroid has. Exhibit A: Its 108-acre property in Norwood, Mass., where 250 employees make film. The bankruptcy filing values it at $1.1 million, but the town of Norwood appraised it at nearly $34 million. Shareholder Stephen J. Morgan says that public assessments show Polaroid's real estate is worth $144 million.

Foreign assets, including factories in China, Mexico, the Netherlands, and Scotland, and were not valued, although Polaroid said in its SEC filing that "long-lived" foreign assets were worth $154 million. A photo collection including prints by William Wegman and Ansel Adams was given an "undetermined" value. In the meantime, Polaroid is developing a low-cost instant digital-printing technology, which former CEO Gary T. DiCamillo said could generate $1 billion in sales over the next five years.

Despite its latent value, Polaroid attracted little interest among the 170 companies investment bankers contacted. Eastman Kodak Co. (EK ) and Fuji Photo Film Co. execs visited but did not bid, sources close to the company say. The only rival bidder, Deutsche Bank, withdrew, possibly put off by Polaroid's shaky business prospects. Instant film is an endangered species, with sales expected to drop for the foreseeable future. It will take millions before the new digital-printing technology is ready.

Still, Polaroid retirees and shareholders say they're getting the shaft. "This is another example in the making of today's well-publicized corporate corruption and infectious greed," retiree John D. Gignac, who claims to represent 2,100 pensioners, wrote Judge Walsh.

With so many high-profile bankruptcies under way, OEP's deal proves there's plenty to fight over. Even at the most unappreciated companies.

By Geoffrey Smith in Boston

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