BlackBerry Was Just Kidding About Someone Buying It
You have to admire BlackBerry's tireless efforts to put a brave face on things. In September, after announcing disastrous earnings and firing a third of its employees, BlackBerry had the bright idea of telling everyone that Fairfax Financial Holdings was going to buy it at $9 a share. That was sort of in the ballpark of maybe being kinda true, but it depended on Fairfax (1) getting financing and (2) not coming to its senses. Fairfax had until today to come to its senses and guess what?
BlackBerry Ltd. abandoned plans to sell itself and began searching for a new chief executive officer after a $4.7 billion takeover plan collapsed, sending shares of the struggling smartphone maker plunging.
Fairfax Financial Holdings Ltd., BlackBerry's largest investor, walked away from its bid for the company, opting instead for a $1 billion bond deal and a management shakeup.
But the official announcement from BlackBerry is downright chipper:
"Today's announcement represents a significant vote of confidence in BlackBerry and its future by this group of preeminent, long-term investors," said Barbara Stymiest, Chair of BlackBerry's Board. "The BlackBerry Board conducted a thorough review of strategic alternatives and pursued the course of action that it concluded is in the best interests of BlackBerry and its constituents, including its shareholders. This financing provides an immediate cash injection on terms favorable to BlackBerry, enhancing our substantial cash position."
So I mean obviously the vote of confidence here would be for Fairfax to buy the company like it said it would. Walking away from the deal is a vote of significantly less confidence, which is why the stock is down more than 10 percent today. Instead of raising $4.7 billion to buy the company, Fairfax is raising $1 billion -- only $250 million of which is its own money, the rest coming from co-investors -- to buy into the company in a senior position. Fairfax will still get equity upside above $10, the conversion price of the bonds, but it's ahead of the common shareholders if BlackBerry ever goes bankrupt which, I mean, you know, at some point that is a thing you might want to talk about.*
Also Fairfax Chief Executive Officer Prem Watsa will be lead director of BlackBerry, and BlackBerry will replace its CEO, Thorsten Heins, with a new interim CEO "pending completion of a search for a new Chief Executive Officer" that will presumably be led by Watsa.
So instead of stumping up $4.7 billion in its own and others' money to buy BlackBerry, taking all of the equity upside and downside and controlling the company, Fairfax will stump up $1 billion of its own and others' money -- only $250 million of its own -- to take a lot of the equity upside, little or none of the downside, and basically control the company. That is a much better deal for Fairfax: It gets most of the benefit of buying BlackBerry, with considerably less of the risk.**
But of course, at this point, what could BlackBerry do? It had announced its deal with Fairfax, subject to due diligence. (Though: What else could it do then either?) Nobody else was clamoring to buy BlackBerry, in part I guess because of the $157 million breakup fee that any competing buyer would have to pay Fairfax. (But mainly for the same reasons that Fairfax and its lenders weren't clamoring to buy BlackBerry either.) If the Fairfax deal fell apart in diligence -- if even BlackBerry's very publicly announced savior wanted nothing to do with it -- that would be, um, a bad sign. The sort of bad sign that would scare away customers and potential financing sources. At least this deal solves the financing-sources problem, or $1 billion of it anyway, and generates a chipper press release for the customers.
A useful question to ask is: If, after earnings in September, Fairfax had approached BlackBerry and offered this deal, what would the company have done? I suspect $1 billion of senior investment at onerous terms would not have been that attractive back then: BlackBerry wanted to sell. So Fairfax offered BlackBerry, not a deal to sell the company, but the next-best thing, a sort-of-deal to sell the company, which at least allowed it to put out a cheerful press release. But which also turned into leverage to get this much better deal for Fairfax. Which BlackBerry couldn't really say no to. The priority remains on the cheerful press releases.
* Also "an immediate cash injection on terms favorable to BlackBerry"? Maybe? It's a 7-year bond with a 6 percent coupon that Fairfax can convert into stock at $10 a share. Another mobile-phone maker that you might remember from the 1990s, Nokia, happens to have a 6ish-year bond outstanding (CUSIP 654902AB1, rated B1/B+) that trades at about a 4.7 percent yield. So BlackBerry's bond is considerably more expensive and is convertible.
** "Much better deal" is importantly distinguishable from "good deal." If BlackBerry goes to zero they will still be sad, though there's a lot of cash, maybe the bonds will have a decent recovery, I dunno.
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Matthew S Levine at firstname.lastname@example.org