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Fairfax submits draft BlackBerry offer as spectre of rival bid looms

A BlackBerry Z10 is held up during the global launch in Toronto on Jan. 30, 2013.


Fairfax Financial Holding Ltd. has submitted a draft of its takeover agreement to BlackBerry Ltd., according to sources.

But the Canadian firm might have competition in its bid to take the ailing tech firm private. According to sources, New York-based private equity firm Cerberus Capital Management LP is seeking to sign a non-disclosure agreement so that it may review confidential BlackBerry information that is only available to prospective buyers. But Cerberus is not a part of Fairfax's consortium, sources said, implying that a rival bid is a possibility.

Cerberus, a buyout firm that specializes in distressed companies, has made big plays for Canadian companies before, buying parts of Teleglobe Inc. and participating in the financial restructuring of Air Canada a decade ago. Cerberus was outbid in its attempt to buy Hudson's Bay Co. in 2006.

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Its interest comes despite revelations by the company that its business is in even worse shape than it disclosed last week.

Sources close to discussions regarding Fairfax's conditional $9-(U.S)-a-share plan for a takeover of the company say the insurance and investment firm led by Prem Watsa has been surprised by the number of overtures from potential partners it has received in the past week.

Former co-CEO Mike Lazaridis, one of the company's largest shareholders, is also rumoured to be interested in participating in a deal. A spokesman for Mr. Lazaridis declined comment. BlackBerry said in a statement that "we do not intend to disclose further developments" until a deal is approved.

News of the renewed buyer interest came after BlackBerry filed its full fiscal second-quarter financial statements late Tuesday, after disclosing last week that the company lost $965-million in its second quarter, largely due to a major writedown of unsold smartphones.

The filing reveals BlackBerry's business is deteriorating quickly across all regions and business segments.

"The intense competition impacting the company's financial and operational results that previously affected demand in the United States market is now being experienced globally, including in international markets where the company has historically experienced rapid growth," BlackBerry said in a regulatory filing. Even in Indonesia, one of its most promising markets in recent years, quarterly revenue was $160-million, down 35 per cent from the same period a year ago.

And BlackBerry suffered one of its steepest declines in its home market. Revenue in Canada was down 60 per cent year over year.

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The company sold just 1.7 million of its new BlackBerry 10 phones to end customers, less than half of consensus analyst estimates, Raymond James analyst Steven Li said in a note, and well below the company's own forecasts. BlackBerry has dropped the price of its touchscreen Z10 phones in an attempt to woo indifferent customers.

Furthermore, the company said in its latest filing that it expected service revenues to slip in the third quarter to $637-million, representing a year-over-year drop of 34.5 per cent. That will likely disproportionately hit the company's bottom line, as services generate high margins for BlackBerry.

The company, which had earlier expressed confidence in its enterprise service business, offered a different story in the new filing: It said "delays in the launch of certain functionality" of the enterprise service for the BlackBerry 10 platform and increased competition "have resulted in a slower-than-anticipated rate of adoption" of the platform by its customers. It acknowledged that uncertainty over its sale process was hurting its business prospects.

The company also disclosed that it expects restructuring charges during its current fiscal year and the first quarter of the following year to amount to $400-million before tax, up from an original estimate of $100-million for this year.

"There's nothing positive from an operational standpoint" in the financial statements, said Veritas Investment Research analyst Neerjaj Monga.

However, he added that potential buyers will actually see some positive signs in the latest disclosures. He noted that the amount committed to pay suppliers had fallen steeply, to $2.9-billion from $5.2-billion in the previous quarter, while the company said it had identified "additional opportunities" to raise cash by selling unneeded assets. On Wednesday, The Globe and Mail reported that BlackBerry is looking to sell of some of its 20 Waterloo-area properties. BlackBerry also has $2.6-billion in cash and equivalents and no debt.

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About the Author

Sean Silcoff joined The Globe and Mail in January, 2012, following an 18-year-career in journalism and communications. He previously worked as a columnist and Montreal correspondent for the National Post and as a staff writer at Canadian Business Magazine, where he was project co-ordinator of the magazine's inaugural Rich 100 list. More


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