Onex to buy Kodaks Health Group for up to $2.55 billion
After much anticipation, the Health Group of Eastman Kodak Company will soon have a new owner — Onex Corporation, Canada’s largest buyout firm. It was announced Wednesday morning that Onex will acquire Kodak’s Health Group in a transaction initially valued at approximately $2.35 billion in cash and up to $200 million more if certain milestones are reached. The deal is subject to customary regulatory approvals and closing is anticipated in the first half of this year. 

Upon completion of the sale, Kodak is expected to retain much of the initial $2.35 billion in cash proceeds, which will be used to relieve $1.5 billion in debt, Bloomberg reports; upon word of the sale, Kodak stock went up 8 cents this morning on the composite trading within the New York Stock Exchange.

Onex will acquire Kodak’s medical imaging and healthcare information technology solutions that include digital x-ray systems, molecular imaging systems, x-ray film, dental imaging products, software and services. Onex also will acquire Kodak’s non-destructive testing business, which sells x-ray film and digital x-ray products into the non-destructive testing market.

The objective of the sale is to allow the Health Group to focus on its digital products, although film-based products will still be developed and sold. According to Kodak, the acquisition also should allow the group to advance research and development projects (R&D) more quickly.

The name “Kodak Health Group” will no longer be used, although a replacement is still being worked on, the company said. However, the group will still have rights for use of current trademarks and the Kodak name for products within the healthcare space, such as Kodak CARESTREAM PACS and other products.

Aggregate revenues of the businesses being acquired were approximately $2.54 billion in the fiscal year ending Sept. 30, 2006. The Health Group's approximately 8,100 employees will stay with the unit after the completion of the sale, according to Kodak. The transaction includes manufacturing operations and a building in Rochester, N.Y.

“This is a great opportunity to acquire and grow a business that has established an extraordinary record in delivering innovative solutions to customers around the world,” said Robert M. Le Blanc, an Onex managing director. “We are very impressed with the Health Group’s world-class products in every sector: medical, dental, molecular imaging and non-destructive testing. The Kodak Health Group has an exceptionally strong management team and we share this team’s vision for the future. We recognize that growth is critical and that digital technology is the future and we believe strongly that customers and employees must continue to be a top priority.”

“This transaction creates an extraordinary opportunity for our global organization to meet the growing medical imaging and information needs of the healthcare community now and into the future,” said Kevin J. Hobert, president of Kodak’s Health Group. “Onex has a long track record of acquiring businesses and working with them to achieve superior growth and operational excellence. Onex’s expertise and its commitment to this business, together with the Health Group’s proven product portfolio, worldwide presence and highly talented employee base will result in tremendous opportunities to provide the best in customer service.”

Kodak’s product portfolio after the sale of the Health Group will include digital cameras and printers for the consumer market, kiosks for retailers and document scanners and production printers for commercial use.

During a webcast on the acquisition, Le Blanc stated that a lot of intermingling between Onex divisions is not expected, and the transition to current Kodak customers should be pretty seamless. And because the Health Group will now function as a stand-alone entity rather than just a division within Kodak, the company will have more freedom to speedily pursue product development, he said.

Hobert seconded the notion that this move will give the Health Group more freedom. “We’re in a market that is in transition,” he said. That means a different business model for the group including changes in how they run their business. Overall, the acquisition should be a liberating move, Hobert added, because the unit will be a stand-alone company rather than a business within a business.

No changes are planned for Kodak employees, and as far as organizational changes, the new Kodak actually will be adding staff to bring in some expertise to fill holes in the current Health Group organization where they used to lean on Kodak corporate, said Hobert. But, he added, there will be no big portfolio changes.

Le Blanc will serve as the chairman of the group’s Board, which will be otherwise comprised of individuals from outside of the to-be-renamed Kodak Health Group, he said. Hobert will maintain his role as group president.

Neither Le Blanc or Hobert offered specifics about the Health Group’s outlook for 2007, yet Hobert did state that he expects customers to feel a good deal more comfortable and optimistic about the company now that the cloud of uncertainty regarding the future of the unit has lifted. Growth in 2007 will be found primarily through digital technologies as either part of the dental or medical areas, Hobert added.

Regarding the acquisition, Antonio M. Perez, Kodak’s chairman and CEO, stated that “Onex is an ideal acquirer of Kodak’s Health Group because they understand the health industry and are committed to growing the business for the benefit of customers and employees. I’m very pleased that we have such a favorable outcome for all of our constituents.”

The equity investment of approximately $475 million to complete the acquisition will be made by Onex Partners, Onex’s large cap private equity fund. The investment by Onex Corporation, as a limited partner in that fund, is expected to be approximately $188 million. The acquisition agreement provides that if Onex Partners realizes an internal rate of return in excess of 25 percent on its investment, Kodak will receive payment equal to 25 percent of the excess return up to $200 million.

Onex 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. Through these activities Onex generates annual management fee income and is entitled to a carried interest on approximately $3.5 billion of third-party capital.

Upon the completion of this purchase, Kodak's Health Group will be the seventh healthcare company Onex has acquired in the past four years, although the others are largely in the provider space.

Onex is a diversified company with annual consolidated revenues of approximately $20 billion and consolidated assets of approximately $20 billion. Onex is one of Canada’s largest companies with global operations in service, manufacturing and technology industries. Onex shares trade on the Toronto Stock Exchange under the stock symbol OCX. 

audioListen to highlights from a conversation between Kevin J. Hobert and Health Imaging News. Hobert addresses the implications of the acquisition for customers, the outlook for new products, and likely improvements to the company’s R&D process.