Bidding begins for BlackBerry as FairFax makes $4.7b offer

Takeover bids for Waterloo, Ont.-based BlackBerry Ltd. officially began after Toronto investment firm Fairfax Financial Holdings Ltd. said it made an offer to acquire the Canadian smartphone maker for $4.7 billion US, or $9 US per share. The tentative deal involves a six week “diligence period,” expected to end Nov. 4, 2013, during which BlackBerry may solicit other offers, the companies said in a release Monday. After that date, FairFax and BlackBerry may move ahead with the acquisition agreement, which would take the company private. “We see the $9 as a starting bid,” Northern Securities analyst Sameet Kanade said in an interview on BNN Monday, adding that prospective bidders can look at BlackBerry's books before making offers. “Now that you've got a $9 bid in place, the books are now open. At the very least, there would be that much more comfort for other potential bidders coming into play. Nine dollars, for us, undervalues the company by about $1. We think there may be more to come than just a final bid from FairFax,” he said. The smartphone maker issued a preliminary earnings release Friday showing a net loss of $950 million US to $995 million US for its second quarter—swelling from a net loss of $84 million US in the previous quarter—due to unsold smartphones, particularly its new Z10 device. It released a new Z30 smartphone this month. The company also revealed plans to cut another 4,500 employees from a staff of about 12,300, and to reduce its operating costs in half by the end of its first quarter of 2015. The company's full second quarter results are due Sept. 27. Under the proposed purchase, FairFax would lead a consortium with financing from Bank of America Merrill Lynch and BMO Capital Markets, the release said. “The parties' intention is to negotiate and execute a definitive transaction agreement by such date . During such period, BlackBerry is permitted to actively solicit, receive, evaluate and potentially enter into negotiations with parties that offer alternative proposals,” the release said. Fairfax, which owns about 10 per cent of BlackBerry's shares, is headed by chairman and chief executive Prem Watsa, who stepped down from BlackBerry’s board this year to avoid a potential conflict. Watsa said in a statement Monday that the transaction would “open an exciting new private chapter for BlackBerry, its customers, carriers and employees.” Watsa added: “We can deliver immediate value to shareholders, while we continue the execution of a long-term strategy in a private company with a focus on delivering superior and secure enterprise solutions to BlackBerry customers around the world.” Potential bidders will be taking a close look at BlackBerry's patents, its BBM messaging technology, and its services business, to help determine its value, Kanade told BNN. He said some companies, such as IBM Corp., could see higher value in BlackBerry depending on its strategic value to the prospective buyer. “They may be willing to pay more dollars for the same business because it adds value to their business,” Kanade said. The analyst said he estimates BlackBerry's patent portfolio to be worth about $2-4 US per share. It's still possible that BlackBerry will be broken up and sold in pieces, he said. According to the tentative agreement, BlackBerry may reach a deal with an alternative buyer within six months of Nov. 4, the release said, provided the acquisition talks happened during the diligence period. In that case, BlackBerry would pay Fairfax a break fee of 30 cents US per BlackBerry share, or about $157 million US. "The Special Committee is seeking the best available outcome for the Company's constituents, including for shareholders,” Barbara Stymiest, chair of BlackBerry's board of directors, said in a statement, referring to BlackBerry's special committee looking at strategic alternatives. “Importantly, the go-shop process provides an opportunity to determine if there are alternatives superior to the present proposal from the Fairfax consortium.” Members of the consortium were not made public, leading to questions about whether all of the financing is in place. There was uncertainty Monday over whether other offers will emerge and if the FairFax deal can draw enough financing. “They got a bid. Good for them. It could be the best thing for the company,” BGC Partners analyst Colin Gillis told Reuters on Monday. “But here’s the problem: It’s a bid, but it’s a bid with no financing. And I don’t expect a bidding war to break out over this property.” Gillis told Reuters that the chance of the FairFax offer falling apart is about the same as as another bid coming along. Stephen Takacsy, an investment officer and portfolio manager with Lester Asset Management, told BNN Monday that FairFax's proposal is a "stalking horse" bid, or an offer that sets a purchase price and avoids other bidders from lowballing value of the company. "This reminds me very much of the fall from grace that PalmPilot suffered. They were the first ones in with the pocket organizer. They lost their lead and they never recovered," he said. In a comment released Monday, Jan Dawson, chief telecom analyst at research firm Ovum, said BlackBerry's announcement last week that it is not pursuing the consumer market is its "death knell" and that it's likely the company "will be out of the device business entirely by the middle of next year." BlackBerry Messenger is only on BB devices, Dawson noted, pointing out that the company announced over the weekend that its messaging technology will not launch as planned on Apple Inc.'s iOS or Google Inc.'s Android devices. "If you strip out BlackBerry's use of its QNX operating system for BlackBerry devices, you're left with a business that's worth less than $100 million ," Dawson wrote. "About the only part of BlackBerry that looks to be worth a significant amount at this point is its patent portfolio, and that certainly wouldn't justify the purchase price on its own." Dawson said FairFax is unlikely to turn around BlackBerry unless it plans a radical change in strategy. "And that means we're likely seeing the beginning of the end for one of the most iconic brands in mobile technology," Dawson said. The FairFax offer is subject to a binding agreement and approval from BlackBerry's board as well as other conditions such as regulatory approvals, the release said. If a foreign-owned company proposes a deal to acquire BlackBerry, the Conservative federal cabinet would have to approve it under the Investment Canada Act. This month, BlackBerry registered with the federal lobbying commissioner to talk to the federal government about Canada's foreign takeover rules. Industry Minister James Moore said last week he wants BlackBerry to “make it on its own” and compete with the iOS and Android mobile platforms. “I want BlackBerry to grow and to continue to employ Canadians and to continue to innovate and be a challenger to the Android and iOS platforms and Windows platforms,” he told reporters in Oakville, Ont., on Thursday last week, before the company's announcement Friday of sagging sales, losses, and further layoffs. Shearman & Sterling LLP and McCarthy Tetrault LLP are acting as legal advisers to Fairfax, the release said. BlackBerry's stock closed at $8.82 US on Monday, up 1.1 per cent. —With reporting by Simon Doyle at sdoyle@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

Bidding begins for BlackBerry as FairFax makes $4.7b offer

News | September 23, 2013

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Bidding begins for BlackBerry as FairFax makes $4.7b offer

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