What's Wrong with This Picture?

Asked by attorneys for Stephen Morgan, leader of a shareholder group, why the foreign subsidiaries weren't valued, CFO Flaherty said they were part of "Mother Polaroid," and were essentially worthless if the parent ceased to be a going concern. Any book value for the subsidiaries, art, patents, and trademarks, he added, would be misleading. The judge concurred, ruling that the best way to value assets was in a "fair and open" bidding process.

A Creditors' Plan
Last April, the company drew up a "placeholder" reorganization plan premised on the sale of all of the company's assets foreign and domestic to OEP, part of a so-called stalking-horse bid. This bid is a lead offer against which other offers are supposed to compete. (Polaroid's choice of OEP as the stalking horse reflected a search since "early 2001," according to testimony from Dresdner Kleinwort Wasserstein, Polaroid's investment bank.) The April plan allowed for competing bids to be received at a June auction, along with OEP's initial bid of $265 million, plus $200 million in assumed trade liabilities. But the bidding procedures, allowing the debtor to determine which prospective bidders got access to proprietary data, among other debtor privileges, drew numerous complaints from the U.S. Trustee counsel, Mark Kenney, engaged in the proceedings as an observer.

The procedures, according to a written objection filed by Kenney, "vest the debtors with excessive and inappropriate authority to control the bidding process" and "to chill the bidding to ensure that the subject assets are sold to their handpicked buyer." He also noted that the committee of unsecured creditors had vehemently opposed the sale, and said he believed that Polaroid's plan was "to liquidate in a transaction that is primarily for the benefit of the secured creditors."

Indeed, the unsecured creditors and shareholder Stephen Morgan, along with the Polaroid Retirees Association, had opposed the bidding on numerous grounds, saying that Polaroid had dramatically undervalued its assets and should instead be reorganized.

At a May hearing on the bidding procedures, a month before the auction, the judge overruled all objections, but changed some bid procedures and extended the auction date several weeks to allow the unsecured creditors to present a reorganization plan as a competing bid to the OEP deal. (Kenney indicated, without explanation, that these changes satisfied his concerns.)

Backed by financing from Congress Financial and Deutsche Bank, the unsecured creditors prepared their plan. It didn't contain a dollar value, since it was in the form of a reorganization. But it gave unsecured creditors 100 percent of the new company, after paying off the secured creditors, and raised the possibility of retaining the pension plan — which wasn't included in the OEP bid.

The June 26 auction, to determine who would eventually run Polaroid, presents one of the best examples of how Polaroid and its secured creditors seemed to control the bankruptcy process. Both OEP and the unsecured creditors' committee presented their offers, the only two in the auction. Polaroid attorney Gregg M. Galardi, however, disagreed with financial projections made by the committee, and said it lacked sufficient "exit financing" to get the company out of bankruptcy protection. The auction was recessed. The committee returned with an oral commitment for exit financing, but said it needed three days to get a written term sheet. Polaroid and secured creditors, however, were unwilling to delay the proceedings. Further, Galardi said they still preferred a sale to a reorganization, suggesting that unsecured creditors would be out of the running in any event.

Seeing the writing on the wall, the unsecured creditors dropped out, agreeing instead to participate with OEP. For its part, OEP increased the participation for unsecured creditors from the original 6 percent to 35 percent, while lowering the total of the offer to $255 million, plus trade-debt assumption.

Getting Cash Back
Walsh approved Polaroid's sale to OEP on June 28, after hearing testimony from Dresdner Kleinwort Wasserstein that the bidding had been open and fair. Because the unsecured creditors had withdrawn their bid, the judge didn't analyze the proceeding transcripts before making his ruling. "There is absolutely no testimony to support the conclusion that anything was withheld from the market in [this transaction]," he ruled. On July 31, Primary PDC Inc., as the "old Polaroid" shell is known, received a check from OEP for $186.7 million, along with 35 percent of the stock of the new company, to be distributed to unsecured creditors. OEP received all of Polaroid's assets, including all of its nonbankrupt foreign subsidiaries.

Of the $255 million total to be paid, $50 million went directly to prepetition lenders. Other terms of the deal, however, allowed OEP to reduce its price by $18 million. OEP got all of Polaroid's cash except for $45 million that Primary PDC kept for administrative claims and other costs. Neither OEP nor Polaroid has revealed how much cash was transferred in the deal (the judge allowed a filing of many sale disclosures under seal), but unsecured-creditor estimates show the company having at least $200 million in cash at closing. If the estimates are accurate, the $237 million in OEP payments would have returned it $164 million in cash (plus about $1.5 billion in other assets), for a net cost of $73 million.

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