BlackBerry Rare Breakup Fee Seen Deterring Bids: Real M&A
BlackBerry Ltd. (BBRY) was so desperate to find a buyer that it agreed to pay its biggest shareholder a rare breakup fee for a tentative takeover offer -- a move that could deter rival bidders.
The struggling smartphone maker last week said a group led by Fairfax Financial Holdings Ltd. (FFH), a Toronto-based insurance company, signed a letter of intent for a $4.7 billion buyout. While Fairfax Chief Executive Officer Prem Watsa hasn’t yet identified the rest of the buyout group or obtained committed financing, BlackBerry agreed to pay the group a $157 million fee if it strikes a better deal with another buyer.
BlackBerry’s willingness to agree to a fee without signing a definitive agreement is “unheard of” and may have a chilling effect on its auction, according to Tor Braham, the former head of technology investment banking at Deutsche Bank AG. If a higher bid comes along, Watsa -- a BlackBerry board member until last month -- gets the termination fee plus he can cash out on an almost 10 percent holding.
“It’s a desperate situation,” Willy Shih, a professor of management practice at Harvard Business School and former executive at Eastman Kodak Co., said in a phone interview. “The terms of the deal recognize their difficult situation. Fairfax is pretty shrewd.”
This is a “beautiful” deal for Watsa, Shih said.
BlackBerry spokesman Adam Emery declined to comment on how the termination fee structure affects the auction. Paul Rivett, president of Fairfax, didn’t respond to e-mails or phone calls seeking comment on the deal terms.
Should it back out of the tentative agreement, BlackBerry will owe Fairfax a fee of 30 cents a share, or about $157 million, the Waterloo, Ontario-based company said in a Sept. 23 statement. The agreement doesn’t say that Fairfax, whose offer is still subject to due diligence and negotiation, owes BlackBerry anything if its proposal isn’t consummated. BlackBerry won’t owe a fee if the consortium lowers its bid below $9 a share without board approval.
The breakup fee rises to 50 cents a share, or about $262 million, if the smartphone maker and Fairfax sign a definitive transaction. That higher fee is about 5.6 percent of the deal value, above the average termination fee of 3.5 percent for U.S.-based targets in 2012, according to a June report by investment banking firm Houlihan Lokey.
“It’s highly unusual that a seller gives a breakup fee to a buyer with no committed financing,” Morton Pierce, a New York-based partner in the mergers and acquisitions group of law firm White & Case LLP, said in a phone interview. “You don’t do that if you have options.”
BlackBerry is eliminating a third of its staff and refocusing on only business customers after quarterly revenue missed analysts’ estimates by half. Sales in the Americas fell faster than anywhere else, tumbling 56 percent to $610 million for the three months through August.
Investors remain skeptical about a better deal, with the stock closing last week about 11 percent below Fairfax’s offer of $9 a share.
Today, BlackBerry shares fell 1.1 percent to $7.95.
The fee “very well could be enough money to deter a private-equity fund from jumping in,” Braham said by e-mail. A leveraged buyout firm “would inherently be tight for capital, and having to borrow an extra $150 million to go to Fairfax could make someone say, ‘Life is too short.’”
Bankers had been canvassing potential buyers in search of a deal for almost a year, two people with knowledge of the matter told Bloomberg News in August. JPMorgan Chase & Co. and RBC Capital Markets quietly contacted possible bidders and found little interest in the whole company, especially among private-equity firms, said the people, who asked not to be named because the talks were private.
Silver Lake Management LLC, which is taking struggling personal-computer maker Dell Inc. private for $24.9 billion with founder Michael Dell, said it looked at taking a stake in BlackBerry and decided against it.
“We don’t have enough confidence to underwrite what the business plan will look like,” Michael Bingle, a managing partner at the private-equity firm, said Sept. 27 at a conference in New York. “When you don’t have that confidence, it’s tough to really pursue this opportunity.”
Two of Canada’s largest pension funds, the Ontario Teachers’ Pension Plan and the Alberta Investment Management Corp., held preliminary discussions with Fairfax about its bid for BlackBerry, two people familiar with the talks said. The funds aren’t interested in backing a bid for the whole company and haven’t joined the bidding consortium yet, the people said last week.
While the termination fee isn’t necessarily a “deal killer” for potential rival bidders, it’s more likely to help Fairfax find firms to join its consortium, said Colin Gillis, an analyst at BGC Partners LP in New York.
“Fairfax gets a free look and can walk away with no penalty until Nov. 4th,” Gillis said in a research note last week. “The risk of a bidding war breaking out for BlackBerry is low, particularly given what we view are favorable terms to Fairfax.”