BlackBerry buyout could get boost with $500-million tax refund

BlackBerry Ltd. may soon have $500-million (U.S.) more cash to help fund a buyout, thanks to a tax refund it expects to receive in the next year.

The money, which BlackBerry refers to in financial documents this week as "a significant income tax refund," would be a timely cash infusion that would enable a potential buyer to use less borrowed money.

Fairfax Financial Holdings Ltd. has signed a letter of intent to pay $4.7-billion for BlackBerry and is now seeking to pull together cash to execute the deal, and other private-equity groups are also said to be looking at the smartphone maker. What isn't clear yet is how much debt the company could support in a leveraged buyout. While the company has currently has no debt, its business has been burning cash – meaning banks are likely to restrict the amount they will lend it.

BlackBerry said in corporate filings that it expects to receive the money in the first half of fiscal 2015, or by the end of August next year. A BlackBerry spokesman would not say Thursday if the bulk of the refund is expected from Canada, or if it involves other jurisdictions.

Based in Waterloo, Ont., the company pays income tax in numerous countries around the world. However, BlackBerry has received sizable tax refunds from Ottawa before. In June, BlackBerry reported a significant tax refund from the Canadian government during the first quarter, relating to its taxes for fiscal 2013. It appears from the disclosure that that refund was more than $500-million (Canadian).

Fairfax has said it is seeking debt financing from Bank of Montreal and Bank of America in advance of a deal. Securing debt financing for a company with uncertain market prospects requires security against the loan.

The pending tax refund could help secure those funds. Banks will typically lend money against a future tax refund – though the lenders would conduct their own due diligence to satisfy themselves that the refund claim is legitimate, and will arrive when BlackBerry expects.

If the lenders balk because they are not confident the full tax return is coming, there is another option outside of the banks. There is a market to sell future tax refunds, in which a buyer would take the risk that the refund doesn't come, or is delayed. In that scenario, BlackBerry would have to settle for an amount less than the face value of the tax refund to reflect that possibility.

Fairfax, the insurance and investment firm led by Prem Watsa, is offering a conditional $9 (U.S)-a-share for the company. But the Toronto-based company may run into competitors in the auction. Private equity player Cerberus Capital Management LP of New York has been mentioned as a possible suitor for BlackBerry, which ruled the smartphone market a decade ago, but has lost ground to powerful rivals such as Apple and Samsung.

Company founder, and former co-CEO, Mike Lazaridis is also said to be interested in taking part in a bid for BlackBerry, though the company has declined comment. Mr. Lazaridis is also one of the company's largest shareholders.