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Doubts about Fairfax buyout hit BlackBerry's stock

BlackBerry shares soared this week, immediately after the company and Fairfax Financial Holdings Ltd. , announced a letter of intent outlining the broad strokes of a $4.7-billion (U.S.) deal that would pay the smartphone maker’s stockholders $9 a share

Dado Ruvic/Reuters

Days after Fairfax Financial Holdings Ltd. announced a $4.7-billion (U.S.) plan to take over BlackBerry Ltd. , investors appear to be losing faith that a deal will actually materialize.

BlackBerry shares soared Monday, immediately after the company and Fairfax announced a letter of intent outlining the broad strokes of a deal that would pay the smartphone maker's stockholders $9 (U.S.) a share.

In the days since the announcement, however, BlackBerry's share price has once again been caught in a downward spiral. On Wednesday, BlackBerry shares sank about 6 per cent to close at $8.26 (Canadian) on the Toronto Stock Exchange and $8.01 (U.S.) on Nasdaq, well below the indicated offer price, as investors fretted about Fairfax's ability to raise enough equity to make the deal happen.

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When the Fairfax proposal was first announced, it appeared to stabilize BlackBerry's declining stock price by giving the company some leverage to go looking for better deals. Instead, investors and analysts are having second thoughts, and worry that the $9 is a ceiling – the best deal BlackBerry could get under any circumstances.

"Some people thought maybe this bid would be a floor on the stock," said Canaccord Genuity analyst Michael Walkley. "I think it went the opposite way."

Mr. Walkley said the unusual nature of the deal, which requires BlackBerry to pay a hefty breakage fee if it walks away but places no such constraints on Fairfax, shows just how weak the smartphone maker's hand was at the negotiating table, and how unlikely it is for any competing bids to come through.

"I think everyone's having trouble raising enough to buy [BlackBerry] out. I'm not expecting anything above the $9 range."

Late on Wednesday, BlackBerry issued a terse release saying it will no longer be holding a conference call to discuss its earnings on Friday, as had been planned for months. Instead, the company will simply issue a press release on Friday. By canceling the call, BlackBerry executives will not have to answer analyst questions in a public forum, as is the norm with quarterly earning calls.

Under the terms of the letter of intent, which is less formal than an actual acquisition agreement, Fairfax has until Nov. 4 to complete due diligence on BlackBerry's business. However, the primary concern among a growing number of observers is not whether the would-be buyer will like what it sees in BlackBerry's books, but whether Fairfax can even raise enough money to make the deal happen.

"[Fairfax], which holds about 10 per cent of BlackBerry's equity, has not yet disclosed which other investors would join its $9-per-share bid," senior Bernstein analyst Pierre Ferragu said in a research note to clients Wednesday, "and it appears that the deal has been announced before any type of financing has been secured."

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Mr. Ferragu estimates that, should the Fairfax deal fall through, BlackBerry shares could sink to just $5.

BlackBerry already released the highlights of its earnings last week, including almost $1-billion in losses, the vast majority of which is related to the writeoff of unsold BlackBerry 10 smartphones. BlackBerry also announced that it will shed 4,500 jobs, or roughly 40 per cent of its work force, in a move to slash costs.

The uncertain future of what was once one of Canada's most profitable companies leaves investors with little hope of recouping their losses of recent years, especially those who bought in when the shares traded well above $100, said Adrian Mastracci, president of Vancouver-based KCM Wealth Management Inc.

"I think you have to look at the [Fairfax] offer and say if I have any confidence in the offer, I'll stick it out, and if I don't, I'll sell now and go have a beer somewhere to drown my sorrows," Mr. Mastracci said.

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