Blackberry Still Not A Buy, Despite The LBO Potential

| About: BlackBerry Ltd. (BBRY)

First things first, I must congratulate my fellow SA contributor Ashraf Eassa on a particularly prescient call he made regarding BlackBerry (NASDAQ:BBRY) on 22nd of September:

I wouldn't be bold enough to short the stock here, as I'd still be pretty worried about a potential "buyout". That being said, the odds are that this stock goes lower and that the price you see today (~$9) will be the eventual "take-over" price (if it does indeed get taken over).

On the following day, the stock hit a new 52 week low of $8.19, only for the trading of the shares to get halted as the following news hit the wire:

WATERLOO, ONTARIO -- BlackBerry Limited today announced it has signed a letter of intent agreement ("LOI") under which a consortium to be led by Fairfax Financial Holdings Limited ("Fairfax") has offered to acquire the company subject to due diligence.

The letter of intent contemplates a transaction in which BlackBerry shareholders would receive U.S. $9 in cash for each share of BlackBerry share they hold, in a transaction valued at approximately U.S. $4.7 billion.

Now let's get the obvious out of the way: with BlackBerry shares closing at $8.82 on Sept. 23, the upside to the potential buy-out price is a mere 2%, so I think you have to be crazy to be buying shares at these levels.

Another fellow SA contributor thinks buying in might make sense:

Very likely : Buyout goes through, buyers at $8.83 yield an instant 2%

I disagree: it's an insanity to potentially lock up your money for weeks (and possibly months) for a 2% gain, while having enormous downside risk. The complete list of downside risks would be huge, so I will only go over the ones I consider most important.

What is a "letter of intent"?

The important thing to note is that Fairfax is not agreeing to buy BlackBerry, it is agreeing to intend to buy BlackBerry. However, BlackBerry IS essentially agreeing to be bought out by Fairfax.

If BlackBerry backs out of the deal and/or accepts a buy-out offer from another party, it will have to pay Fairfax a cool $157 million in penalties, reducing further any potential for a competitive offer.

Risk of failure to secure financing.

As per the news release (emphasis added):

The BlackBerry Board of Directors, acting on the recommendation of a special committee of the board of directors (the "Special Committee"), approved the terms of the LOI under which the consortium, which is seeking financing from BofA Merrill Lynch and BMO Capital Markets, would acquire BlackBerry and take the company private subject to a number of conditions, including due diligence

Fairfax has not secured financing of the deal, it is merely seeking it.

Risk of Fairfax backing away.

The deal is subject to due diligence: Fairfax has until Nov. 4 to look at BlackBerry's books and figure out whether this deal actually makes any sense.

At first it might seem odd that Fairfax would need to do this, after all, they have been a shareholder since 2011, but considering the amount of negative surprises from BlackBerry over the past couple of years, I don't think I can blame them.

If Fairfax does it's due diligence and decides not to proceed (and unlike BlackBerry, Fairfax can actually walk away from the deal without a penalty), can you imagine what kind of a signal that would send to other potential suitors? There would be no floor for the share price if this was to happen.

Risk of shareholders blocking the deal.

Fairfax currently owns roughly 10% of BlackBerry. While surely a significant stake, there is no guarantee whatsoever that Fairfax can convince or force the required amount of company shareholders to give up their stake for $9 a share in order for the deal to go through.

As can be seen from the discussions on Seeking Alpha and various other Internet forums, people have wildly differing opinions regarding the true value of BlackBerry.

Some hold the opinion that the company is worth almost nothing, but I think it's a safe bet to assume that the majority of these people no longer own any company shares and as such are unable to influence the acceptance or rejection of the deal.

Others are convinced the company is worth way way more, possibly in the range of $12-14 a share or even higher and surely this is the kind of investor who might be still holding on to their shares despite the barrage of bad news and convincing them to give up their stake for $9 a share might be a tall order indeed.


With very limited upside and huge downside risks, my verdict is clear: stay away.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.