BlackBerry Ltd. (BBRY) is preparing to lobby the Canadian government over foreign-takeover issues amid investor concern that a domestic buyout of the struggling smartphone maker won’t happen.
The company has registered to meet with lawmakers to discuss the Investment Canada Act, which sets rules for foreign acquisitions of local companies, according to federal lobbying documents. The government automatically reviews any takeover bid of more than C$344 million ($332 million).
The push comes amid speculation that Toronto’s Fairfax Financial Holdings Ltd. (FFH), BlackBerry’s largest shareholder, faces long odds in putting together a homegrown bid for the company. While the investment firm is talking to Canadian pension fund managers to build support for a deal, it hasn’t yet had success, according to a person with knowledge of the discussions. Credit-default swap trading suggests that investors are increasingly doubtful that Fairfax will prevail with the effort.
“Why would Canadian pension plans buy this thing?” said John O’Connell, chief executive officer with investment firm Davis Rea Ltd. in Toronto, which doesn’t own a stake in BlackBerry or Fairfax. “There’s no indication that this business has bottomed, and every indication to show they continue to lose market share.”
After years of losing ground to Apple Inc. (AAPL) and Google Inc. (GOOG)’s Android, BlackBerry announced plans last month to form a special board committee to explore a sale of the company. Giving more leeway to a foreign buyer could make it easier for an acquirer like Lenovo Group Ltd. (992) or Microsoft Corp. (MSFT) to step in and do a deal.
BlackBerry executives made the disclosure about discussing the Investment Canada Act with lawmakers and government officials in the past week, according to the lobbying register. Before that, the act hasn’t been listed as a subject of interest to the company for years.
BlackBerry also has hired Perella Weinberg Partners LP as an adviser -- alongside JPMorgan -- to help explore its options, a person familiar with the decision said. The Wall Street Journal reported earlier today that the New York-based firm had been engaged by BlackBerry. Lisette Kwong, a spokeswoman for Waterloo, Ontario-based BlackBerry, declined to comment. Representatives for Perella Weinberg didn’t immediately respond to a request for comment.
Government officials reviewing any takeover will be sensitive to the fact BlackBerry is the biggest corporate spender on research and development in the country and a major employer, said Anthony Baldanza, a Toronto-based partner at law firm Fasken Martineau DuMoulin LLP. BlackBerry may have to prove the business would be better off in the hands of a foreign acquirer, while addressing potential national-security concerns in Canada and the U.S, he said.
“If we were discussing this five years ago, when BlackBerry was a leading smartphone supplier and a national champion, it would have been very difficult,” Baldanza said. “The situation has changed dramatically.”
Fairfax President Paul Rivett and Microsoft spokesman Peter Wootton declined to comment. Doug Augustine, a spokesman for Beijing-based Lenovo, didn’t respond to a request for comment.
Lenovo, the world’s largest personal-computer maker, said in January that it was assessing potential acquisition targets, including BlackBerry. At the time, Canadian Finance Minister Jim Flaherty said certain local technologies were off-limits to foreign buyers. The government would look “carefully” at a bid from Lenovo, he said. BlackBerry operates secure servers for the Canadian and U.S. governments, which would put additional scrutiny on a Chinese deal.
Microsoft also is a potential buyer, even after its Sept. 2 agreement to buy Nokia Oyj (NOK1V)’s mobile-phone business, people with knowledge of the situation said last week. Pairing BlackBerry with Nokia would let the software company roll up the industry’s smaller competitors, potentially creating more of a threat for Apple and Android.
Still, sealing a deal for BlackBerry may not be easy -- either at home or abroad. JPMorgan Chase & Co. (JPM) and RBC Capital Markets, BlackBerry’s bankers, spent close to a year quietly canvassing potential acquirers without success, people with knowledge of the matter said last month.
When BlackBerry formed the board committee to explore a possible sale, Fairfax CEO Prem Watsa stepped down as a director. That allowed the Toronto businessman to begin discussing a local bid for the smartphone maker without potential conflicts of interest. Fairfax held a 9.9 percent stake in BlackBerry as of June 30.
A senior executive from Fairfax has been contacting Canada’s largest pension fund managers to discuss collaborating on a bid for BlackBerry, said the person familiar with the matter, who asked not to be identified because the talks are private. No specific proposal, sales or valuation figures have been put forward, the person said.
The three largest pension fund managers in the country are Canada Pension Plan Investment Board, Caisse de Depot et Placement du Quebec and Ontario Teachers’ Pension Plan, which together manage more than C$500 billion in assets.
Representatives from the three funds declined to comment. The Globe and Mail reported earlier that Fairfax’s buyout plan had received a “cool” response from pension plans.
Swaps to insure Fairfax debt against default indicate declining risk and lower odds the company will lead a buyout that could saddle Fairfax with debt. The contracts fell eight basis points this week to 164 basis points, the narrowest in almost seven months.
Credit-default swaps narrow as confidence in a borrower improves and the cost of protecting the debt drops. Swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. One basis point equals $1,000 annually on a contract protecting $10 million of debt.
BlackBerry’s board began discussing a possible sale after its revamped BlackBerry 10 operating system struggled to gain traction. The company sold almost 1 million fewer smartphones in the May quarter than analysts had projected, contributing to a loss in the period. BlackBerry, which reports its next round of results on Sept. 27, has said it expects to post another loss in the latest quarter.
The company also has cut its sales force and moved some staff to the U.S. in a bid to bolster its new devices. BlackBerry has eliminated 60 jobs as part of the move, spokesman Adam Emery said this week. The redeployment of salespeople is intended to help get employees closer to key customers in the U.S., he said.
BlackBerry shares had rallied late last year on optimism that the new operating system would revive the company’s fortunes. Between BlackBerry’s last earnings report in June and today, the stock has tumbled 28 percent. The shares fell 4.7 percent to $10.43 today in New York.