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BlackBerry Sale: Fairfax Deal Far From Certain

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Thorsten Heins, CEO of Research in Motion, introduces the BlackBerry 10, Wednesday, Jan. 30, 2013 in New York.  (AP Photo/Mark Lennihan)
Thorsten Heins, CEO of Research in Motion, introduces the BlackBerry 10, Wednesday, Jan. 30, 2013 in New York. (AP Photo/Mark Lennihan)

TORONTO -- One of BlackBerry's largest shareholders has made a multibillion-dollar offer for the troubled smartphone maker hinged on several conditions that make the outcome anything but certain.

A letter of intent to acquire the Waterloo, Ont.,-based company in a deal that values the company at US$4.7 billion is being led by Canadian investment firm Fairfax Financial (TSX:FFH) and includes a consortium of others who have not been identified.

But it's only a tentative agreement to take the company private that could be sidelined by a variety of factors, and that has some analysts concerned.

"They're just trying to buy themselves some more time here,'' said MKM Partners analyst Mike Genovese. "This does not read like an actual deal; this is an announcement to stem the bleeding and buy some time.''

It's "crazy that they would do a letter of intent before doing due diligence,'' added Genovese.

At first glance, the move by Fairfax, which owns about 10 per cent of BlackBerry common shares, may seem like a vote of confidence in the company's future.

But the letter of intent, filed with the U.S. Securities and Exchange Commission, outlines various ways that Fairfax could exit the deal with a hefty payout, or step away if it deems the transaction unattractive.

Fairfax could back out if it's not satisfied with its due diligence on BlackBerry's finances or if it doesn't receive the financial backing it needs, according to the public release.

And, under the agreement, Fairfax would benefit from break fees associated with other bidders who might emerge in the coming months with a better deal, or from a transaction that materializes within six months after the due diligence wraps up in early November.

"We have devoted substantial time, resources and energy to studying the company,'' writes Fairfax president Paul Rivett in a letter to BlackBerry's special committee formed to look at its strategic options.

"We believe our offer provides and extremely compelling combination of attractive and certain value for shareholders.''

In the meantime, what the announcement has done is slow the dramatic decline in BlackBerry's stock price, which tumbled 16 per cent on Friday when the company announced it anticipated a near billion-dollar loss for the second quarter on poor sales of its handsets.

The share decline continued on Monday until the BlackBerry-Fairfax pact was announced, which helped the company's
stock (TSX:BB) end flat on the Toronto Stock Exchange at $9.08, and ahead 9.5 cents to US$8.82 on the Nasdaq where it trade under the
symbol (Nasdaq:BBRY).

Analyst Troy Crandall of Montreal investment firm MacDougall, MacDougall and MacTier said the tentative deal is positive for shareholders because "it relieves the uncertainty and volatility.''

"It's far from a done deal,'' the Montreal-based analyst added.

BlackBerry has been struggling to maintain a hold on both its business users and average consumers. Both have turned increasingly to competitors like Apple's iPhone, which posted record sales of its latest devices over the weekend. The iPhone has also become an increasingly popular phone for business users.

"If there's one thing we've learned from the last five years and the smartphone wars, is that bring your own device to work is a very powerful force,'' Crandall said.

"If you get the hearts and minds of consumers, it follows through to enterprise.''

And perhaps that's the biggest question for both Fairfax and BlackBerry: who really wants to buy a BlackBerry device after the company has consistently fallen behind in technological developments and in its financial results?

Chief executive Thorsten Heins is partway through a three-stage plan intended to return BlackBerry to profitability, although the latest financial figure are unlikely to encourage much optimism in that effort. The company has also announced it will cut about 40 per cent of its global workforce, or 4,500 jobs, as a way to save money.

Fairfax chairman and chief executive Prem Watsa says he considers his proposed transaction a new life for the company.

"We believe this transaction will open an exciting new private chapter for BlackBerry, its customers, carriers and employees,'' he said in a statement.

"We can deliver immediate value to shareholders, while we continue the execution of a long-term strategy in a private company with a focus on delivering superior and secure enterprise solutions to BlackBerry customers around the world.''

Watsa is often called the Warren Buffet of Canada for his gutsy investment strategy that has frequently paid off. He is a longtime BlackBerry supporter who has insisted that the company is vastly undervalued.

But it's debatable how many others share that optimism even though Watsa's announcement included a consortium of investors who decided to keep their names out of the headlines.

Canadian pension plans are some of the likeliest partners in this agreement, although none of them were willing to confirm their involvement.

Both the Canada Pension Plan Investment Board and the Alberta Investment Management Corp. declined to comment, as did the Ontario Teachers' Pension Plan.

Other potential Canadian partners include the Alberta Investment Management Corp. and the Ontario Municipal Employees' Retirement System.

The secret consortium is expected to complete its due diligence by Nov. 4. Until then, BlackBerry is allowed to actively solicit and evaluate rival offers, although the company has been shopping itself to prospective buyers in some ways since before the launch of its smartphones last January. Nothing has materialized yet.

A best-case scenario would be that BlackBerry benefits from Fairfax setting a starting bid price of $9 per share, which could theoretically bring out any bidders lurking the shadows.

If that happens, Fairfax would reap the rewards from a break fee of at least 30 cents per share, or about $157 million, if Blackberry signs a deal with another buyer under certain circumstances. The amount increases to 50 cents per share, or about $262 million, if BlackBerry signs a definitive agreement with the Fairfax consortium and then finds another buyer.

The New York Times reported on the weekend, citing sources, that BlackBerry co-founder Mike Lazaridis, who stepped down as co-chief executive in 2011, has approached two U.S. private equity firms about making a possible bid.

"The special committee is seeking the best available outcome for the company's constituents, including for shareholders,'' BlackBerry chairwoman Barbara Stymiest said.

BlackBerry shares have lost more than half of their value since January, before the launch of its latest line of smartphones on the BlackBerry 10 operating system. The phones have widely been considered a dud, especially in the crucial U.S. marketplace.

On Friday, the company said it plans a writedown of up to $960 million in the second quarter, primarily from poor sales of its BlackBerry Z10 touchscreen smartphones. It will also book a $72-million restructuring charge related to changes in its operations, which include previous layoffs.

BlackBerry also expects to post a loss of between US$950 million and US$995 million for the fiscal second-quarter as it projects US$1.6 billion in sales, far short of analyst expectations of about US$3 billion.

During the weekend, the company failed to successfully launch its BlackBerry Messenger service on other smartphone devices. The plan was to make it available for both Apple's iPhones and Android devices, but a technical glitch with a leaked version of the program sidelined the Android launch for an undetermined amount of time.

BlackBerry will report all of the details of its second-quarter financial results on Friday.

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