BlackBerry Limited (Market capitalization as of 27/09/2013: $4.20bn)

Fairfax Financial Holding Limited (Assets under Management as of 30/06: $2.5bn)


On September 23rd, Fairfax Financial Holding Limited, a Canadian insurance and investment company, announced it was leading a group of investors to take over BlackBerry Limited, the Canadian smartphone company formerly known as Research In Motion, at $9.00 per share.

The announcement came after the poor Q3-13 revenue figure disclosed by the mobile manufacturer on Friday the 20th, nearly $1bn of net loss, which adds to the notice that it would lay off almost 40% of its employees, i.e. 4500 jobs, and heavily write down its inventory for unsold products. As a consequence of such results, BlackBerry’ share dropped by ca. 17% to $8.73 from $10.52 thus allowing Fairfax to propose a bid price of $9.00.

Indeed, the Canadian manufacturer is currently facing a deep crisis as its latest products’ sales are heavily hit by the strong competition of Apple and Samsung. The latters are also biting on market share in the high-margin sector of business customers, usually a stable source of income for BlackBerry. For instance, the number of BlackBerry phones used by Credit Suisse employees has fallen dramatically from 16,500 to 8,500 in the last two-year period and the Bring Your Own Device (BYOD) operating model is gaining ground in both BofA Merril Lynch and Citi.

Fairfax, which is already BlackBerry’s shareholder at 10%, leads a consortium which aims refocus the company towards a niche market composed of highly-secured phones of enterprise customers and governments, hence clawing back a long-time lacking profitability. Moreover, BlackBerry would benefit from a restructuring “behind closed doors”. Indeed, private ownership will give managers the time to breathe and assess strategic options. Nevertheless, whether the Canadian company will still be able to achieve the necessary scale to be profitable is not to be taken for granted according to Jan Dawson of Ovum.

The two companies signed a letter of intent (LOI) and are now entering a “diligence period” that will last about six weeks, until November the 4th. In the meantime, Fairfax has the right to change the bid price, thus allowing a correction both upward and downward, while BlackBerry can shop for a better deal. However, provided that the consortium will not reduce the price offered below $9 per share, BlackBerry shall pay a fee of $0.30 per share to Fairfax if it signs a LOI with an alternative buyer within the diligence period or in the following three months (if discussions with the counterparty were held before or during the diligence period).

In fact, there is no assurance that a definitive agreement will be entered into, as the completion of the transaction will be subject to regulatory approvals and Fairfax itself is struggling to find financing. The proposed structure $1bn equity – $3bn debt is facing an adverse banking environment as BlackBerry may only post a collateral worth between $800m and $1.5bn (its patent portfolio). Moreover, its rich cash in hand is being burned quickly ($500m consumed in the last quarter) hence further reducing the chances of obtaining debt financing.

These financing difficulties have raised worries concerning the actual deal feasibility among market participants. Pierre Ferragu, an industry analyst at Bernstein Research, has affirmed that it appeared as if the deal had been announced before financing had been secured. He has also doubted that enough investors would join a bid “that sounds like a last-chance rescue attempt for Fairfax’s stake”.

On the other hand, Mr Watsa, chairman of Fairfax, has insisted his bid is serious and the transaction will be completed after due diligence. He did not name the other investors in the group, but affirmed that the latter has a strong Canadian component. In addition, people familiar with talks said that two Canadian pension funds have held discussions with Fairfax about its bid, even if they will probably not be part of the consortium since they are only interested in pieces of BlackBerry.

This uncertainty has contributed to the slide in BlackBerry’s market capitalization in the last days. Share price has declined from $8.72 on the 20th to $8.00 on the 26th.

If BlackBerry’s fate is yet to be defined, the one of another historical mobile phones’ company, Nokia, looks clearer. Microsoft has recently acquired the mobile phone division of the Finnish group for €5.44bn (€3.79bn for the division Devices & Services, €1.65bn for a 10-year license of Nokia’s patents). The deal, which will be done by the beginning of next year, has been driven by Microsoft’s willingness to enlarge its market share in the smartphones market. On the other hand, Nokia will benefit from a reinforced financial position, as Microsoft will immediately provide the company with €1.5bn in cash.

To conclude, concerning the advisory of the Fairfax-BlackBerry deal, J.P. Morgan and Perella Weinberg are acting as sell-side financial advisors, while Fairfax has hired BDT & COMPANY, LLC, BofA Merrill Lynch and BMO Capital Markets.

To conclude, concerning the advisory of the Fairfax-BlackBerry deal, J.P. Morgan and Perella Weinberg are acting as sell-side financial advisors, while Fairfax has hired BDT


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