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Fairfax offer sparks little optimism from BlackBerry analysts, investors

TORONTO - A highly conditional takeover offer put forward by one of BlackBerry's largest shareholders has left several analysts and traders with little confidence that it will spark a bidding war for the assets of the beleaguered smartphone company.

Instead, there's a 60 per cent probability that investment firm Fairfax Financial (TSX:FFH) and a consortium of financiers will emerge the winners of a US$9-per-share offer that was outlined in a letter of intent earlier this week, said Catharine Sterritt, risk arbitrage strategist at Scotiabank.

"I actually regard this as a quality proposal because it is Fairfax," Sterritt said in an interview Tuesday.

"It's not a fly-by-night hedge fund that's just parachuting in a letter. This is someone who genuinely has a business reputation and they have a very large publicly traded company that matters in our marketplace."

The tentative agreement to take BlackBerry private has numerous caveats, which has suggested to some that Fairfax expects the Waterloo, Ont.,-based company to carve out a separate deal for all — or part — of its operations.

Others have pointed out that if somebody wanted to buy BlackBerry, they would have done so over the past year and a half.

"The market is realizing there's no real buyer out there," said Neeraj Monga, an analyst at Veritas Investment Research Corp.

"If a financial sponsor (like Fairfax) has to end up buying a technology company, in a case where everybody thought there might be massive value in the intellectual property, this suggests there might not be."

If BlackBerry does find another suitor, Fairfax gets a cushy payout of at least US$157 million as a break fee for its troubles — and will reap even more money if a deal is etched out sometime after early November, which is when Fairfax is supposed to sign a definitive agreement for the transaction.

But failing that, Fairfax has protected itself in other ways that would allow the firm to recind its offer if it's not satisfied with due diligence on BlackBerry's finances or doesn't receive the financial backing it needs.

BlackBerry investors appear to be lukewarm on the Fairfax proposal, partly because most of them come out as financial losers regardless of the outcome. The $9 per share offer for the company is a tiny fraction of the value that many small investors bought into the stock. BlackBerry shares touched their all-time high of C$149.90 in June 2008.

On Tuesday, shares of the company fell to $8.78, a decline of 3.3 per cent on the Toronto Stock Exchange, and below the tentative Fairfax proposal.

Prem Watsa, the head of Fairfax, emphasized the Canadian roots of the as yet unidentified consortium, which he says offers a "high level of certainty" that regulators will approve the proposal.

The group will be "a Canadian buyer not subject to Investment Canada review and we do not believe that there are any Competition Act issues or issues under the antitrust laws of the United States that would impede the transaction," he wrote in the letter of intent.

"This will lead to a rapid regulatory approval, delivering cash proceeds to the shareholders as promptly as possible."

Canadian pension plans are some of the likeliest partners in this agreement, although none of them have confirmed their involvement.

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.

CIBC analyst Todd Coupland remains optimistic that the Fairfax offer marks the starting point for other potential acquirers that could drive the price as high as $12 a share.

"Our view is a takeover for BlackBerry is inevitable and that it should come at a higher price," he said, noting that the calculation was made using a "sum of the parts" analysis of the company.

"Interested parties that could bid for Blackberry include other smartphone (manufacturers), carriers interested in the Blackberry network, private equity and the co-founder Mike Lazaridis as part of a consortium."

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

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