The investment firm Fairfax Financial has scrapped plans to purchase BlackBerry (TSX:BB) outright, but will lead a group of investors to inject US$1 billion of funds into the Waterloo, Ont.-based company under new management.
Among the changes, chief executive Thorsten Heins will exit the company with a hefty payout estimated at $22 million.
The announcement Monday was a surprise, considering that Fairfax and others had been poring over BlackBerry's financials to determine whether it was worth making an official bid for the company.
Instead, the new plan extends the lifeline for a technology company that has struggled with an identity crisis, an eroding consumer base, money-losing operations and a failed search for an outside buyer.
"It shows that their intellectual property is not worth much, it shows that their subscriber and cash flows are unpredictable, so it's not a good company for private equity to buy," said Mike Genovese, an analyst at MKM Partners.
"They don't need the money from Fairfax, but this deal is just to show Fairfax has confidence."
In an interview with The Associated Press, Fairfax president and CEO Prem Watsa said he worked with a consulting company that recommended against taking BlackBerry private with borrowed money.
"To load this company with too much debt was not appropriate," he said.
"We probably could do it, but we decided not to add high-yield debt to the company's structure."
Fairfax backed off completely on a leveraged buyout after getting the recommendation, even though five or six investors had been interested, Watsa said.
Regardless of what happened behind closed doors, BlackBerry has never been in such a perilous position, partly because all that's certain now is that new leaders will try to overcome years of massive setbacks.
BlackBerry recently booked a second-quarter loss of US$965 million on the writedown of its sales flop, the BlackBerry Z10 touchscreen. Another US$400 million in charges will come before the end of May 2014, associated with the cost of laying off 4,500 employees, reworking of its smartphone lineup and changes to the company's operations.
New leadership from executive chairman and interim CEO John Chen is hoped to alter the course of BlackBerry. His past experience turning data management company Sybase back into a profitable company, and expanding its business into mobile devices, shows he is up to the challenge.
The question remains whether his appointment is too little, too late. BlackBerry has endured backroom disputes over its direction, major delays in its most recent smartphone line, and mixed message on whether the devices were for business consumers or an attempt to grab a piece of the market from Apple and devices on the Android operating system.
Investors weren't impressed with the new direction, sending Blackberry shares to their lowest level since September 2012. The stock closed down 16.56 per cent, or $1.34, to $6.75 on the Toronto Stock Exchange and $1.28 to US$6.49 on the Nasdaq.
"Other potential bidders have been inside the tent, nobody liked what they saw. Why should we?" wrote National Bank analyst Kris Thompson in a note to investors.
"Investors should expect very poor operating results in the coming quarters (as well as) a declining subscriber base, falling shipments, enterprise defections, market share loss, etc."
Thompson yanked back his target price on BlackBerry shares to US$3 with "above average" risk, from its previous $9 target.
Other changes in the boardroom include the ousting of longtime board of directors chair Barbara Stymiest, who received the lowest level of support from shareholders at the company's annual meeting in July.
Under the new plan, Watsa will make a return to BlackBerry's board. He left, due to a conflict of interest, before the company held a strategic review in August.
Watsa announced on Sept. 23 that Fairfax would lead a group that would pay US$9 per BlackBerry share — about $4.7 billion.
The most visable change is the departure of CEO Heins, who will leave the company once the agreement is finalized. Earlier this year, BlackBerry agreed to a compensation package that would pay him $22 million if he was removed from his job at BlackBerry without a change of ownership.
What remains uncertain is BlackBerry's future. For now, the smartphones will stay on store shelves and Blackberry will report its financial results as a public company.
One of the options is to shut down the handset business, although that would pull the plug on a business that is still generating money for the company.
Another would be to try and monetize its BlackBerry Messenger platform, which recently expanded to availability on iPhones and Androids. Executives have said they aim to make money from advertisers on the app, though they weren't entirely clear on how that would work.
Several analysts say most of these are short-term fixes to what's almost inevitable.
"We now believe a breakup is more likely than an outright sale," wrote Canaccord Genuity analyst Michael Walkley.
"In the interim, we believe BlackBerry's fundamentals will continue to deteriorate over a longer public sale process under new management."
The new plan is for Fairfax to lead a group that will buy US$1 billion of convertible debt — a type of security that will pays six per cent interest annually but can be converted into BlackBerry shares if they rise above US$10.
Carmi Levy, an independent tech analyst, said Monday's announcement wasn't the end of a possible BlackBerry sale, but that this path was clearly not what the company hoped for when it put itself on the block.
"It would have been so much simpler for them to just accept a cheque from a large suitor and be bought out," said Levy.
"They already admitted a year and a half ago they couldn't go it alone; now they have to go it alone. There's no good news in this story at this point. It adds an additional layer of challenge to a company that didn't need it."
Note to readers: This is a corrected story. An earlier version incorrectly stated when BlackBerry shares closed lower than $6.75