Fairfax hands BlackBerry $4.7-billion lifeline

Fairfax Financial Holdings Ltd.'s preliminary offer to buy BlackBerry Ltd. for $4.7-billion (U.S.) sets out a potential rescue plan for a company that is losing the fight for smartphone customers.

The $9-a-share bid, announced Thursday, puts at least a temporary halt to the deluge of bad news surrounding the Waterloo, Ont.-based company. Late Friday, BlackBerry issued a grim set of financial results, saying it lost nearly $1-billion in the second quarter, is writing off a large inventory of unsold phones and will cut 4,500 jobs.

The shares lost about 20 per cent of their value following that announcement. Then the Fairfax news broke in the early afternoon Monday, and the stock jumped 7 per cent, closing at $9.08 (Canadian).

But there's still a large amount of uncertainty about the bid. Fairfax, which already owns 9.9 per cent of the company, has been given six weeks to comb through BlackBerry's confidential information and firm up its $9-a-share offer.

As it seeks to ensure there are no hidden land mines, it must also convince its potential equity partners that they will make a solid profit on the deal.

It's a tough sell. Speaking at a conference Monday, André Bourbonnais, senior vice-president of the Canada Pension Plan Investment Board's private-equity unit, said his pension fund would as a matter of course examine any possible bid. But he said he that for any deal to succeed, it needed to include a "strategic" player, such as another technology firm, to help turn BlackBerry around. "My view is it needs the right kind of investor," he said.

The proposed buyout offered a glimmer of hope in the Waterloo region. Because BlackBerry is a public company, "it's hard to watch, locally, [with] the global and American media just bashing BlackBerry every couple of months" said Mark Hallman, who runs his own online marketing company in BlackBerry's home city.

BlackBerry is more than just a critical employer in the area: it is one of Canada's most iconic brands.

It popularized the smartphone, and its global success lifted the nation's pride and propelled its technology sector. Now, it's emblematic of what some say is an inability of Canadian firms to maintain their market dominance while maintaining domestic ownership.

"We hope the new Canadian owners of BlackBerry can revive this Canadian champion, save these high-skilled jobs and promote Canadian innovation globally," NDP industry critic Chris Charlton said in a statement.

But it's not yet clear that Fairfax will wind up as BlackBerry's new owner. "It looks like a non-deal deal," said a former senior BlackBerry insider who spoke on condition of anonymity. "I think [Fairfax CEO] Prem Watsa wanted to put a floor on something that is collapsing, and to kickstart a process to show that it's real. That says to me the process of finding buyers is struggling."

Fairfax is not naming its potential equity partners in the deal, although Mr. Watsa said that a significant portion of the money would come from Canada. Right now there are only financial players, as opposed to other technology firms, in the group.

"If the right strategic investor comes in we'd consider taking them as a partner in this company," Mr. Watsa said. "We're looking at any possibility for the good of the company, its customers and its employees."

Fairfax has been speaking to numerous private equity players and pension funds over the last month. One source indicated that the Ontario Teachers' Pension Plan has shown the most interest of the major Canadian pension funds, but it has not yet made a commitment.

Analysts at Macquarie Capital said in a research note that they believe it will be difficult for the Fairfax group to raise financing due, to the high level of cash BlackBerry is burning through and the large number of subscribers it is losing.

One source said BlackBerry and its advisers were previously reluctant to accept an offer this low, but the board signalled to Fairfax late Friday that it was prepared to accept the $9-a-share bid in order to move quickly to prevent a customer exodus after Friday's negative news. The offer sets a floor price for future potential bids and gives BlackBerry time to look for a more lucrative offer.

BlackBerry said Fairfax is expected to complete its due diligence by Nov. 4 and that the intention is to sign a definitive deal by that date. If BlackBerry finds another offer in that time, it might have to pay Fairfax a break fee of 30 cents (U.S.) per share.

The company has entertained the possibility of being taken over in the past, but no compelling bids emerged.

Fairfax has a history of investing in companies that are going through tough times and is BlackBerry's largest shareholder. Mr. Watsa joined the board at the start of 2012 but stepped down last month to avoid criticism over a potential conflict of interest as he sought to find a future path for the beleaguered company, which had just officially put itself up for sale.

Fairfax has lined up Bank of America and Bank of Montreal to contribute debt financing to its offer. One person familiar with the details said that the two banks have committed to raise more than $3-billion of debt for the transaction.

Editor's Note: André Bourbonnais's comment has been clarified in this online version of the article.