Time is running out for Fairfax Financial Holdings Ltd. (FFH) to make good on its $4.7 billion bid for BlackBerry Ltd. (BB)
The Toronto-based firm has until 5 p.m. today to come forward with a more definitive offer for the Canadian smartphone maker, following the preliminary takeover proposal it made six weeks ago. The company has been struggling to attract the financing for the deal, according to people familiar with the deliberations. It also has yet to name any other members of its takeover coalition.
The deadline, which the two sides set when they signed the acquisition agreement on Sept. 23, will force Fairfax Chief Executive Officer Prem Watsa to show his hand. If his firm can’t execute the current deal, it will have to ask for more time, withdraw its offer or come back with different terms.
The lack of progress also presents an opportunity for rival suitors. Cerberus Capital Management LP has been discussing a joint bid with BlackBerry co-founders Mike Lazaridis and Doug Fregin and chipmaker Qualcomm Inc. (QCOM:US), two people with knowledge of the matter said. Today’s deadline was meant to be the end of a go-shop period, during which BlackBerry could solicit higher offers. If would-be bidders don’t expect Fairfax to reach a deal on time, they have the luxury of waiting -- and seeing if an already-battered stock falls further.
“If Watsa and Fairfax can’t get financing done by Monday, they did the process a disservice by creating that deadline,” said Sachin Shah, a strategist in special situations and merger arbitrage at Albert Fried & Co. in New York. “These other parties need more time.”
Shares of Waterloo, Ontario-based BlackBerry fell 5.6 percent last week, closing at $7.77 on Nov. 1. That puts the stock almost 14 percent below Fairfax’s $9-a-share offer, reflecting skepticism that the deal will happen. The shares have tumbled 35 percent in 2013.
Fairfax is BlackBerry’s largest shareholder, with a 9.9 percent stake, so the firm would have benefited if its tentative offer had sparked a bidding war. Still, Fairfax imposed a breakup fee on BlackBerry that would force the smartphone maker to pay $157 million if a superior bid emerged before 5 p.m. today. The termination fee would rise to about $262 million if Fairfax goes through with a definitive deal in time.
If the Fairfax proposal falls apart, other bidders could sidestep the breakup fee, giving them more incentive to wait.
Cerberus, a private-equity firm that specializes in distressed assets, has been examining BlackBerry’s finances with an eye toward making a bid, one of the people familiar with the situation said. The New York-based firm has teamed up with Lazaridis, who served as BlackBerry’s co-CEO until last year, and Fregin, who used to run the company’s operations, said two of the people. If Qualcomm joins the group, it would bring the support of the world’s biggest maker of mobile-phone chips.
Qualcomm gets the majority of its profit from licensing patents, which cover much of the fundamental technology in wireless networks. A stake in BlackBerry would give the company access to additional patents, as well as mobile-phone hardware and software.
Lazaridis and Fregin, who together own 8 percent of BlackBerry, declined to comment, as did representatives for BlackBerry, Cerberus and Qualcomm. Fairfax President Paul Rivett didn’t return an e-mail and phone call seeking comment.
BlackBerry kicked off the bidding process in August when it said it would consider selling the company as part of a strategic review. At the time, Fairfax’s Watsa left the smartphone maker’s board so he could pursue a deal.
The company put itself on the block after a new operating system failed to regain ground lost to Apple Inc.’s iPhone and devices powered by Google Inc.’s Android software. The first model in its revamped lineup -- a touch-screen phone called the Z10 -- flopped with consumers.
On Sep. 20, the company took a $960 million charge to write off unsold Z10 inventory and said it would cut a third of its workforce. Three days later, Fairfax made its tentative offer.
Fairfax hasn’t said what will happen if it can’t raise financing for its bid by the 5 p.m. deadline. The firm’s advisers, Bank of America Corp. (BAC:US) and Bank of Montreal, have been rebuffed by other lenders in their search for funding, people with knowledge of the talks have said.
Even so, BlackBerry’s individual assets could be attractive. Its patent portfolio would fetch between $1.6 billion and $3 billion, according to analysts’ estimates. And its enterprise business, which manages fleets of e-mail servers for corporate and government customers, may be worth as much as $1.1 billion, according to Raymond James Financial Inc.
The company also had $2.6 billion in cash at the end of last quarter. That means the sum of its parts could exceed BlackBerry’s current $4 billion (BBRY:US) market value.
Given that scenario, Cerberus and a so-called strategic bidder like Qualcomm could easily finance a deal, said Albert Fried’s Shah. San Diego-based Qualcomm has a market value of $120 billion, along with cash and short-term investments of about $11.5 billion at the end of last quarter. That essentially makes it a “strategic bank,” Shah said.
Still, there’s no guarantee the Cerberus-Qualcomm-Lazaridis group will make a firm bid, said Matt Skipp, chief investment officer of Toronto-based hedge fund SW8 Asset Management Inc., which has bet against BlackBerry’s stock in the past.
Companies may be taking advantage of the situation to look at BlackBerry’s books, Skipp said. That doesn’t mean they’re going to make an offer.
“A lot of people given the option to look at the inner workings of a company like BlackBerry would probably do so,” he said. “It’s interesting that the stock continued to go down, even as you had perhaps more interest and louder news on Cerberus and Qualcomm.”
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