Published On: Thu, Nov 7th, 2013

BlackBerry bid collapse

Investors in BlackBerry are having a wild ride. The shares have slumped 16% in the last couple of days, following news on Monday that the proposed takeover by Fairfax Financial Holdings Limited was off the table. Fairfax is BlackBerry’s largest investor, and often gets its contrarian investments right, most notably by betting against the US housing market. Its investment portfolio is worth about US$25 billion.

Blackberry Share Price Collapse

Fairfax had proposed a bid of US$9 per share for the buyout, which represented a premium of only 9% on the quoted share price. However, it seems it could not attract other institutional investors even at this price, and consequently the traded share price dropped to US$6.50 when news of the failure reached the markets. This represents the lowest price that BlackBerry has traded at this year, which had seen the price around US18 per share in January.

While Fairfax was unable to put together financing for the buyout, it has now put together a plan in collaboration with other investors to inject US$1 billion into the company in convertible bonds. Fairfax’s share of the investment is US$250 million, and the new investment will help to stabilize the company while further options are explored.

The convertible bonds should be in place within the next two weeks, and are convertible into common shares at a price of US$10 each with a term of seven years. The bonds would pay 6% interest per year unless and until they are converted into shares. Part of the cash deal is that the company will take on a new leader. You may recall that Thorsten Heins took on the CEO role in January 2012. He is leaving with a US$22 million payoff, and the new chief executive is planned to be John S. Chen.

Chen is an experienced technology industry executive, known for turning around the fortunes of Silicon Valley software company Sybase. Though he lives in California, he has agreed to commute to BlackBerry’s home city of Waterloo, Ontario by company jet. Chen was personally chosen by Fairfax chairman Prems Watsa, apparently as a condition of the US$1 billion financing. Watsa would also return to the board of BlackBerry, a position he held before August but relinquished to avoid any conflict of interest while the takeover was explored.

BlackBerry has been declining over several years, losing a position of 50% of the market down to its current 6% in the face of competition from Apple and Samsung. What brought matters to a head was the lukewarm sales of the new BlackBerry Z10 touch screen device, which was intended to be the company’s salvation. Despite receiving great reviews, the market has not taken up the device in significant numbers. With a deteriorating cash situation, it is estimated that without the cash injection BlackBerry would run out of money by the end of 2014.

Most analysts feel that BlackBerry’s problems are not temporary but structural, as it is gradually losing its core business. National Bank analyst Kris Thompson expressed his findings as, “Investors should expect very poor operating results in the coming quarters, a declining subscriber base, falling shipments, enterprise defections, market share loss, etc.” He has changed his previous target price of US$9 per share down to US$3 per share, and labelled the company as having “above average” risk.

It is possible that BlackBerry will stop making phones entirely and focus on its enterprise business, running e-mail servers for government and corporate clients. In the short term this will hit the company’s revenues, but it is the playing out of a breakup of the company which some consider the best way to return to profitability.


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About the Author

- Robert is a private trader with over 15 years experience trading the financial markets.