Fairfax consortium bids $4.7 billion to take BlackBerry private

TORONTO Tue Sep 24, 2013 5:08am IST

A Canadian flag waves in front of a Blackberry logo at the Blackberry campus in Waterloo, September 23, 2013. REUTERS/Mark Blinch

A Canadian flag waves in front of a Blackberry logo at the Blackberry campus in Waterloo, September 23, 2013.

Credit: Reuters/Mark Blinch

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TORONTO (Reuters) - Smartphone maker BlackBerry(BB.TO) has agreed to go private in a $4.7 billion deal led by its biggest shareholder, allowing the on-the-go email pioneer to regroup away from public scrutiny after years of falling fortunes and slumping market share.

The $9 a share tentative offer, from a consortium led by property and casualty insurer Fairfax Financial Holdings Ltd(FFH.TO), will set a floor for any counteroffers that might emerge for Blackberry, which has been on the block since August.

As an investor, Fairfax Chief Executive Prem Watsa is often described as the Canadian Warren Buffett because he also takes the long view.

Blackberry shares peaked above $148 in June 2008 when the company's devices were still the top choice for bankers, politicians and lawyers.

The stock, halted pending the announcement on Monday, closed below the offer price on Nasdaq, at $8.82, indicating the market's lack of faith that other bids would emerge.

"I would think a competing buyout offer is quite unlikely," said Elvis Picardo, strategist at Global Securities in Vancouver. "The miniscule premium, and the muted market reaction, is another indication that the market views the odds of a competing bid as slim."

BlackBerry, based in Waterloo, Ontario, once dominated the market for secure on-your-hip email. But it introduced consumer-friendly touchscreen smartphones only after it lost the lead to Apple Inc's(AAPL.O) iPhone and devices using Google Inc's(GOOG.O) Android operating system.

BlackBerry has until November 4 to seek superior offers, which the Fairfax group has the right to match. The group is seeking financing from Bank of America Merrill Lynch and BMO Capital Markets to complete the deal and has until that November 4 deadline to conduct its due diligence.

A BlackBerry statement did not name members of the consortium, although many in the financial community see Canada's deep-pocketed and influential pension funds as likely participants.

"We need to be careful given disclosure constraints, but we can say that we are focused on a strong Canadian solution," said Fairfax spokesman Paul Rivett.

The pension funds, with assets around the world, traditionally take a long-term view in their investment decisions. Officials at the biggest funds either did not reply to requests for comment, said they had no information or declined to comment.

"We never discuss whether or not we plan to enter into any investment," said Deborah Allan, spokeswoman for Ontario Teachers' Pension Plan.

CANADIAN BUFFETT

Watsa stepped down from the BlackBerry board of directors in August, citing a potential conflict of interest, as the company said it was exploring a sale.

Canada's Globe and Mail newspaper quoted Watsa as saying that a significant amount of the equity in the deal will come from within the country. The consortium included neither strategic players, nor other technology firms, he said.

BlackBerry's recent challenging years have been in stark contrast to the rapid growth it previously enjoyed.

The Z10 touchscreen device that the company hoped would claw back market share from the iPhone thudded badly at launch in January, and it has lost ground even in emerging markets where it had carved out an important role.

A spokeswoman for phone company MTN Nigeria, for example, said that while BlackBerrys are still very relevant in Nigeria, "the adoption rate has declined significantly from a year ago due to lack of newer low to mid-end smart phone models." In Brazil, locally made iPhones are the first choice for government workers. "I have never seen a Brazilian government employee using a BlackBerry," said one government source.

And while some U.S. government agencies still use only the BlackBerry, others allow devices like iPhones as well.

The American Lawyer surveyed 83 of the top 200 U.S. law firms in November 2012 and found that 90 percent of them expected to see a drop-off in the number of Blackberry devices.

John Sroko, chief information officer at Duane Morris, said that three years ago the firm only offered BlackBerry devices because they were deemed most secure. But in recent years, the firm has allowed their lawyers to use other devices too.

"People like Blackberry for the keyboard and email," he said. "The switch was caused by a better browsing experience and the apps."

NOBODY ELSE

Donald Yacktman, president and founder of Yacktman Asset Management which holds something under 1 percent of BlackBerry according to Thomson Reuters data, said he does not expect a counteroffer to emerge.

"This is pretty much Plan B. They've clearly not hit the targets," he said.

Jack Gold, principal analyst and founder of J. Gold Associates, said "this is probably the best possible outcome of several unattractive options for BlackBerry."

"Going private and potentially bringing back the founder of the company, Mike Lazaridis (as has been rumored) could buy them some time to put the house in order," he noted.

Lazaridis, BlackBerry's co-CEO until early 2012 and a board member until March, did not respond to requests for comment.

On Friday, BlackBerry said it would step back from the hypercompetitive consumer market and focus on what it calls enterprise customers - businesses, governments, legal firms and security forces.

The company warned it would report revenue on the sale of just 3.7 million of its phones for the entire second quarter, and write down almost $1 billion.

By contrast, Apple sold 9 million iPhone 5s and iPhone 5c models in three days after their Friday launch.

A Defense Department official said the Pentagon had more than 600,000 mobile devices in use in spring, including 470,000 BlackBerrys, 41,000 devices with Apple operating systems and 8,700 smart phones with Android systems.

"We are moving towards a secure mobile communications infrastructure that supports a variety of devices," the official said.

Blackberry has rarely traded below $9 a share even in recent years when it issued profit warnings, slashed jobs and launched devices that arrived late to disinterested audiences.

In the past 12 months the stock has risen as high as $18.32 and fallen as low as $6.22 on the Nasdaq.

BDT & Company, LLC, BofA Merrill Lynch and BMO Capital Markets are acting as financial advisors, and Shearman & Sterling LLP and McCarthy T├ętrault LLP are acting as legal advisors to Fairfax in connection with the transaction.

(Writing by Janet Guttsman; Additional reporting by Solarina Ho, Julie Gordon, John Tilak, Leah Schnurr, Cameron French, Sinead Carew, Todd Benson, Tim Cocks and Casey Sullivan; Editing by Gerald E. McCormick, Carol Bishopric and Richard Chang)

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