BlackBerry – O Canada

BlackBerry is to remain Canadian but at what price?

• BlackBerry has agreed to be acquired by a consortium led by Toronto based Fairfax Financial Holdings for $9.00 a share.
• There will now be a 6 week due diligence period during which BlackBerry is free to seek other offers but if it decides to go down an alternative route it will have to pay Fairfax at least $141m as a termination fee.
• This is essentially a classic leveraged buy-out and the consortium will be seeking significant financing to complete the deal.
• I see two possible motivations for the deal.
• First. An emotionally driven desire to ensure that Canada remains present in the technology industry.
  • This desire could be particularly strong after the ignominious exit of Nortel Networks.
  • It is of no surprise that Fairfax Financial is a Canadian institution and if this is the primary driver of the deal, the consortium will look to do a turnaround of the whole company with a probable relisting.
  • I cannot see this strategy working (see here) and see the strong possibility that the debt raised for this deal ends up trading at cents on the dollar.
• Second. A break-up and refocus of the company.
  • BlackBerry’s departure from any attempt to win consumers means that BBM no longer fits within BlackBerry.
  • Furthermore, this is an asset with significant value and I can see this being sold off.
  • BlackBerry also has a meaningful patent portfolio that could raise more than $1bn if it were to be sold.
  • The handset business needs to be downsized to focus on the target customers (enterprise and prosumer) and the service revenues that they generate.
  • It is not impossible that the handset business is closed all together and the company moves to a complete ODM sourcing of handsets.
  • If the new entity can be made cash generative once again then the debt could be paid down with a combination of operating cash and the proceeds of the sale of BBM and the patent portfolio.
  • This would leave the equity holders with a clean, much smaller but cash generative business that could be sold or relisted.
• The problem with both of these strategies is that there appears to be no room left for BlackBerry. (see here)
• Microsoft with Nokia is looking to move in and hoover up all of BlackBerry’s customers.
• Furthermore the transition to BES 10 from BES 7 requires a full upgrade giving customers the perfect opportunity to switch to something else.
• Current holders of the equity should be glad that they have found someone willing to take the shares off their hands for $9 per share.
• Given the outlook, $9 per share is a great price.