Dan Primack, one of those people that generally has a sane-ish take on M&A and other activity, has this interesting and skeptical opinion on Fairfax Financial and Blackberry:
Fairfax Financial, a listed Canadian insurance company with some retail and restaurant holdings, yesterday announced that it has agreed to acquire BlackBerry for $4.7 billion. But all it really did was acquire some free optionality. In fact, the only way Fairfax loses money here is if it actually does the deal.
Rather than signing a formal acquisition offer, Fairfax signed a letter of intent to acquire BlackBerry at $9 per share. That’s an 8.95% premium to where BlackBerry opened trading yesterday morning, albeit well below where it was trading just one week earlier (when it opened at $10.41 per share). For the month, BlackBerry’s average trading price had been $10.59 per share. For the year, shares are down more than 30%.
Fairfax also didn’t say where the money was coming from, save for unidentified equity investors (financial, not strategic) and faith that BofA Merrill Lynch and BMO Capital Markets can sell a bunch of bonds. Bloomberg reports that Fairfax itself won’t invest any new capital, outside of rolling over its existing 10% stake in BlackBerry.
If BlackBerry manages to find a superior offer before a definitive agreement is signed with Fairfax, then the mobile device maker would be required to pay a termination fee of around $155 million. It would rise to $257 million were a superior offer to materialize after a definitive agreement with Fairfax is in place. Both termination fees require that Fairfax has not lowered its offer below $9 per share. Conversely, Fairfax does not have to pay BlackBerry a single loonie if it pulls out of the process.There had been some Twitter speculation that Warren Buffett could be one of the mystery deep pockets, because Fairfax is being advised by Byron Trott and Fairfax CEO Prem Watsa is an annual Omaha pilgrim, but a source tells me that neither he nor Berkshire Hathaway are involved.
Sure there would be a bit of reputational risk if Fairfax walks away, but it shouldn’t be too hard for it to find a broadly-acceptable reason. After all, BlackBerry stunned the market just last week by warning of a $1 billion quarterly loss (3x analyst expectations), plans to lay off 4,500 employees and a reduction in future product offerings. There is likely some more bad news that will be uncovered during due diligence.
Prem Watsa (a former BlackBerry board director), said the following in a prepared statement: “We believe this transaction will open an exciting new private chapter for BlackBerry, its customers, carriers and employees. 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.”
That’s a whole lot of confidence, given that Fairfax hasn’t ever done a deal like this
before. According to the CapitalIQ database, the company’s largest M&A transactions have all been for less than $2 billion — with no control stakes in the technology sector.
Perhaps Fairfax was attracted to the BlackBerry balance sheet, which currently features zero debt. Or maybe there is some sort of Canadian nationalism in play here. But it’s kind of hard to imagine right now that an insurance company (with a handful of retail and restaurant assets) has figured out a workable investment thesis for a dying smartphone company that every private equity firm and strategic tech acquirer has passed on (save for launching a massive patent war that could end up costing far more than it creates).
So, for now, I’m viewing this as a 10% shareholder’s last-ditch attempt to get someone else interested in BlackBerry. Yes, it sounds incredibly cynical. But right now I can’t come up with a better explanation for what Fairfax is doing.
On the face of it, makes sense…but Prem Watsa has a non-insignificant stake in BlackBerry that he acquired at $17 (as opposed to the $9 that $BBRY is valued at now), and he was on the BB board until very recently. So, even if you discount the obligatory “we are excited about the future” press statement, I wonder if he/Fairfax Financial does have a plan.
An Enterprise play? A “sum of the parts” play? Something else?
The world, or at least some part of it, waits to find out.