BlackBerry Ltd. (BB) is following Dell Inc. (DELL:US) in pursuing a leveraged buyout after losing its market leadership to rivals such as Apple (AAPL:US) Inc. That’s where the comparisons between the two companies end.
BlackBerry’s deteriorating business prospects and a lack of financing make its tentative $4.7 billion buyout agreement a harder sell to investors. The bid, announced yesterday by top shareholder Fairfax Financial Holdings Ltd. (FFH), comes with caveats: The rest of the coalition of buyers hasn’t been identified yet, and funding still needs to be lined up.
Like BlackBerry, Dell used to dominate an industry -- in its case, personal computers -- and sought refuge from the public markets after losing its technological edge. Dell’s buyout, however, had the backing of the company’s billionaire founder and Silver Lake Management LLC. At BlackBerry, meanwhile, Fairfax isn’t committing money to the bid beyond its stake, and prospective buyers ranging from KKR & Co. to Microsoft Corp. are unlikely to join the effort.
“If they have a real name committed in the consortium, they would have flagged the name,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “If they had a strong consortium, not only wouldn’t they keep their names secret, they would put 10,000 spotlights on it and say, ‘Look who’s on it.’”
BlackBerry shares rose 1.1 percent to $8.82 yesterday after the deal was announced, erasing an intraday decline of as much as 6.1 percent. The Fairfax offer represents a 3.1 percent premium over BlackBerry’s closing price last week. The stock remains down 26 percent this year and has fallen about 94 percent since its peak in 2008.
For the next six weeks, a Fairfax-led group will scrutinize the device maker’s books while BlackBerry Chief Executive Officer Thorsten Heins and a special board committee see if there are any alternative proposals.
“This transaction will open an exciting new private chapter for BlackBerry, its customers, carriers and employees,” Fairfax CEO Prem Watsa said in a statement yesterday. “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.”
The Waterloo, Ontario-based phone maker was already retooling its strategy before the buyout was announced. BlackBerry said last week that it’s cutting 4,500 jobs (BBRY:US) and narrowing its focus to corporate and professional customers.
It also is taking a writedown of as much as $960 million for unsold inventory of its Z10 phone -- a touch-screen device unveiled in January as its answer to the iPhone. Sluggish demand for the product contributed to BlackBerry’s weakest quarterly sales in six years and a larger-than-estimated loss.
Both BlackBerry and Dell have seen their market share tumble in recent years, though the PC maker has fared better. It remains profitable, and sales growth is projected to resume in fiscal 2014 after a dip last year.
Those prospects helped founder and CEO Michael Dell enlist Silver Lake’s help in orchestrating a $24.9 billion buyout, which was approved by investors on Sept. 12. Still, even Dell had to fight a seven-month battle with dissident shareholders over the deal and sweetened the bid twice before securing victory. The CEO personally forked over almost $1 billion of his own money.
Fairfax’s Watsa doesn’t plan to contribute more cash as part of the takeover bid for BlackBerry. He will roll over the firm’s 9.9 percent stake, worth $457 million as of yesterday’s close. Other investors will be able to finance the rest of the purchase through equity and debt, Watsa said.
The investor has held talks with BlackBerry co-founder Mike Lazaridis on working together on a deal, according to people with knowledge of the matter, who asked not to be identified because the discussions are private.
In an interview yesterday, Watsa said Lazaridis isn’t yet involved in the transaction. Lazaridis didn’t immediately return an e-mail message seeking comment.
“We wouldn’t put our name on the line and we wouldn’t do this unless we were very confident,” Watsa said.
Watsa resigned from BlackBerry’s board last month to avoid a conflict of interest as the company sought a buyer. Lazaridis, who stepped down as co-CEO last year, still holds about 5.7 percent of the company.
In the search for buyers, BlackBerry was shopped to KKR and Blackstone Group LP (BX:US), and both private-equity firms passed, according to people with knowledge of the matter. Microsoft also is unlikely to pursue a bid for BlackBerry, according to two people with knowledge of the matter.
“The uncertainty around the subject of financing means it won’t lift the stock above $9 for any length of time,” said Matt Skipp, chief investment officer with Sw8 Asset Management Inc., a hedge fund based in Toronto. “The market always likes cash bids, but the market likes cash bids that aren’t subject to financing.” Skipp manages C$55 million ($54 million) and has shorted shares of BlackBerry in the past.
BlackBerry, credited with inventing the first smartphones more than a decade ago, once sold products that were so popular and addictive they were known as CrackBerrys. In recent years, the company failed to keep pace with Apple and Samsung Electronics Co. (005930), which offered better Web browsing and a wider range of applications.
BlackBerry’s share of the global smartphone market shrank to 2.9 percent in the second quarter from 4.9 percent a year earlier, according to IDC. It has fallen to fourth place behind Google Inc.’s Android, Apple’s iOS and Microsoft’s Windows Phone platform.
“Yesterday’s heroes are tomorrow’s losers,” said David Cockfield, fund manager with Northland Wealth Management in Toronto. His firm manages about C$225 million, including a small amount of BlackBerry shares. “I hope Prem Watsa knows what he’s doing.”
The group led by Toronto-based Fairfax is seeking financing from Bank of America Corp.’s Merrill Lynch unit and from BMO Capital Markets, according to yesterday’s statement. BlackBerry will owe a breakup fee of 30 cents a share, or about $157 million, if it chooses an alternate transaction, the company said. If the smartphone maker and Fairfax sign a definitive agreement, the fee will rise to 50 cents a share.
JPMorgan Chase & Co. and Perella Weinberg are advising a special committee of BlackBerry’s board on the transaction. Skadden Arps Slate Meagher & Flom LLP and Torys LLP are legal advisers to the committee. BDT & Co., Merrill Lynch and BMO are Fairfax’s financial advisers, while Shearman & Sterling LLP and McCarthy Tetrault LLP are its legal advisers.
The lead adviser on the deal for BDT is Don McLellan, a former senior vice president of strategy at Motorola Inc. who also oversaw the U.S. Treasury’s capital purchase program in 2008 before joining Byron Trott at his new firm in 2009. Another BDT adviser on the deal, besides Trott, is John Dills, a former executive at the private-equity firm GTCR LLC who also spent time at Goldman Sachs Group Inc.
The tentative bid is “the best the company can get to survive,” said Neeraj Monga, an analyst with Veritas Investment Research Corp. in Toronto. “At least under a private owner they can shrink to a size where they may become profitable and a sustainable business.”
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