BlackBerry's fate may rest on Fairfax's attempts to raise $4.7bn for bid
(Guardian Web Via Acquire Media NewsEdge) BlackBerry, the Canadian smartphone company, could be the target of a bidding war and breakup if Fairfax Financial Holdings cannot fund a $4.7bn buyout by 5pm EST (10pm GMT) on Monday.
Unconfirmed reports say that several major banks have declined to take part in funding the bid, worrying that it will not be possible to put the business on a path to recovery as both business users and consumers abandon it for other platforms.
Other bidders including co-founder Mike Lazaridis, allied with chipmaker Qualcomm and Cerberus Capital, the Chinese computer and smartphone maker Lenovo, and Facebook have been rumoured as potential bidders if Fairfax, which owns 10% of BlackBerry's shares, cannot pull together the funding by the close of business.
They could be interested in the company's patents, which have been valued at around $2bn, and also in its business customers and large-scale network business, including its BlackBerry Messenger business, recently launched for the iPhone and Android phones. The handset business, though, is reckoned to be a huge lossmaker for the company, and analysts reckon it would cost about $1bn to shut it down, leaving just a small contract manufacturing business to serve remaining customers.
Google, Cisco, Samsung, LG and SAP are also understood to have spoken to BlackBerry managers about the possibility of a bid or deal. SAP later said that BlackBerry did not fit its strategy. Other companies haven't commented on their position.
The deadline for the buyout bid was set on 23 September, when BlackBerry's board said that it would consider a $9-per-share bid from Fairfax ahead of others, subject to financial penalties if it considered other offers first.
But in the six weeks since, there have been growing rumours that Prem Watsa, who stood down from BlackBerry's board in order to lead Fairfax's buyout bid, has been unable to interest enough financial backers in making the bid to spread the risk.
Fairfax is reported to be working with BMO Capital Markets and Bank of America Merrill Lynch to raise the financing.
A clause signed by BlackBerry's board means that if it accepts another bid before Fairfax's, it has to pay Fairfax $157m; it a higher rival bid arrives after the Fairfax bid - which the BlackBerry board would be obliged to accept, to maximise a shareholder payout - then the penalty rises to $262m.
Thorsten Heins, BlackBerry's chief executive, stands to benefit by $35m if he loses his job as a result of a takeover at a $9-per-share price, as part of a revied contract he signed in May and which was agreed by Watsa, BlackBerry chair Barbara Stymiest and board director John Wetmore. The change tripled his compensation if there were a change of control.
But analysts and markets have been sceptical that the money can be raised - or that BlackBerry merits the $9 per share price that Watsa's tentative proposal suggested.
BlackBerry's business has collapsed as consumers have shifted to rival smartphones from Apple, Samsung and others, while mobile carriers have declined to pay it the "data premium" that they used to when it would carry messages between BlackBerry phones around the world on its own network. As data costs have fallen, carriers have squeezed BlackBerry on the price they will pay for its users.
Meanwhile business customers have been reluctant to pay for the heavy encryption required in its BlackBerry Enterprise Server (BES) system, and the introduction in January of the BB10 software - which is incompatible with older versions of BES - would require them to upgrade all their server software and handsets at once. That has been unpalatable to many large businesses, which have instead concentrated on ensuring their supplies of old handsets running the earlier BB7 software.
BlackBerry's shares were trading at $7.70 ahead of the market opening on Monday, though they were up slightly to $7.98 in pre-trading. They had collapsed from $10.50 to $8.73 on 19 September ahead of the company's quarterly results on fears about sales - and have never recovered above $8.50 since Fairfax's tentative bid was announced.
Richard Windsor, a former Nomura analyst who runs the Radio Free Mobile consultancy, suggests that "Fairfax has no rabbit to pull out of the hat" because the valuation put on the company "looks way too high to anyone except a BlackBerry shareholder." He values the company at $6.32 - substantially below the current share price - and points to the company's warning on 23 September that it would miss revenue forecasts by a colossal 47%, and that sales of its BB10 devices had tanked. Calling that "the worst profit warning in its history", he says "there has been a systemic loss of confidence in BlackBerry as a going concern. This basically means that most enterprise [large business] customers are now looking for alternative solutions."
He thinks that "Fairfax is going to have to admit that its bid has been all talk and no substance. This will leave BlackBerry once again in the lurch and prey to the circling vultures looking to pick off the plum assets."
He predicts that if the bid doesn't appear that BlackBerry shares could dive by 20% in after-hours trading. "For anyone unlucky enough to be still holding stock, there is only one rational action before the close of trading today," he says.
Without a bid, or a breakup, BlackBerry would have to rely on its own finances. One analyst warned that at the rate seen in its previous quarter, it would burn through its $2bn cash pile in 18 months. The company says it has taken measures to cut costs - but equally could see increasing pressure on margins if its business continues to decline, while the costs of reducing the size of its handset business could require payouts.
The company's cash position could also be hit if suppliers begin demanding payments on shorter terms, which would mean paying cash for components before they can be sold as finished items. One major supplier, Jabil, warned in September that it might stop building parts for the company, which could kill off the handset business.
(c) 2013 Guardian Newspapers Limited.
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