It's too easy to view BlackBerry Ltd.'s aborted auction as just another failure in a too-long list.
The company fails to make a competitive new phone until it is too late. It fails to launch a tablet that sells. It fails to keep market share. It fails to make money. After all that, it fails to find a buyer.
And since we're talking about failure, there is also Fairfax Financial Holdings Ltd.'s apparent inability to pull together a buyout proposal for BlackBerry at $9 (U.S.) a share that had been all but promised.
But if you are someone who still cheers for BlackBerry to remain a Canadian success story, the transaction announced Monday is the opposite of a failure.
Shareholders banking on a $9-a-share takeover will no doubt disagree, and Monday's plunge in the stock price reflects their disappointment. But shareholders, as the Supreme Court of Canada said in a 2008 case about BCE Inc., are only part of the puzzle in Canada. Boards are supposed to think about all "stakeholders."
For Canada's technology industry, for the employees of BlackBerry, for the cities where they do their work, Monday's news – no takeover, but $1-billion in fresh capital for the company – is a lower-risk play.
There is no breakup, no sale of patents. The company remains independent, whole, and Canadian and with a relatively clean balance sheet – one that gives the smartphone maker a better chance of survival than if Fairfax had forged ahead with a leveraged buyout.
Fairfax and its partners have used a convertible debt structure that trades some of the potential upside in an LBO for a much less dangerous downside. In the circumstances, it's a perfectly rational decision for Fairfax, and even for BlackBerry.
This Fairfax-led financing leaves BlackBerry a cash-rich company with minimal interest payments, rather than a cash-poor company with much greater interest costs. It also means the new chief executive officer, John Chen, can get to work on a turnaround without waiting for any full takeover to get approved, a process that can run many weeks.
An LBO would have stripped BlackBerry of much of its cash and added something like $2-billion of debt to its balance sheet. All that money would have left the company to pay stockholders their $9 a share. A debt load that size on a company like BlackBerry would have come with high rates and significant covenants. Interest costs of close to $200-million a year wouldn't be out of line.
In the transaction announced Monday, BlackBerry adds $1-billion of debt. But it also gets that $1-billion to help fund its turnaround plan and keeps the cash that is currently on the balance sheet. The interest rate on the debt is low at 6 per cent, or $60-million a year. What's more, the covenants are said to be much friendlier. In other words: A leveraged buyout would likely have left BlackBerry with somewhere between $1-billion and $1.5-billion of cash and $2-billion of high-interest debt. Now it will have more than $3-billion in cash and $1-billion of lower-interest debt. And BlackBerry is burning cash quickly – all the more reason to avoid the LBO.
Which company has a better chance of making it? The answer is easy.
In the longer run, if BlackBerry fails, Fairfax and its partners in the convertible bond are first in line as creditors, giving them more protection. And they get paid interest in the meantime.
For that, the convertible investors give up significant potential gains.The LBO structure would require a much smaller increase in the value of the company to yield big increases in the investors' returns. That's the other side of leverage.
If the turnaround works, the convertible idea also simplifies one other thing for Fairfax. An LBO requires an exit – a willing buyer or an initial public offering being the usual routes. With a convertible note, the exit is much simpler. You swap your debt into shares in a company that is already publicly traded.
There is still work to be done. A strategic partner is one piece of the puzzle that is still missing. BlackBerry still needs to put a better product into the market – the BlackBerry 10 lines of phones aren't selling well. It has lost huge amounts of market share and cachet.
But a low-debt, cashed-up business is a better place to be for everybody still involved with BlackBerry. For everybody, perhaps, except those common shareholders who would be happy to hang up on BlackBerry for $9.