BlackBerry Deal Tests Limits On M&A Creativity

Sep.24.13 | About: BlackBerry Ltd. (BBRY)

Is the Fairfax bid for BlackBerry (NASDAQ:BBRY) fully financed or not?

According to Bloomberg News yesterday, it doesn’t appear so:

The Fairfax (FFH:TSX) coalition, which hasn’t been identified, is in flux and new investors could join while financing is lined up, said a person familiar with the matter.

Which begs a rather central question. How is there “certain value for shareholders,” as was released in a filing, if the necessary debt and equity financing isn’t firm? Fairfax may well be “highly confident that the consortium can fund the full amount of the consideration and all related transaction fees and expenses,” but that’s not the same thing as offering a fully-financed bid. In my life I can’t recall a ~$5 billion cash takeover bid being announced without the financing being lined up in advance. Often, the Regulators don’t allow such a tactic. According to Fairfax, they are working with Bank of America and Bank of Montreal to line up some debt financing — I’m guessing $1 billion tops — although the insurer has no plans to put in another penny beyond rolling the company’s current 9% BBRY stake (valued around $60 million).

Compare that to Michael Dell’s going private with his company, where Mr. Dell rolled his 16% stake plus contributed another meaningful quantum of new dough to bring his partner Silver Lake on board.

Not that yesterday’s news came as a surprise to readers of this space, since the lack of a strategic acquiror was all but telegraphed by Friday’s massive restructuring (see prior post “BlackBerry moves suggest M&A process failing to produce a strategic buyer” Sept. 24-13). But, to be honest, Fairfax’s press release has the hallmarks of a no-downside strategy, provided the Regulators don’t take issue with it. Since Fairfax already owns what it owns, in the absence of a bidder, it might as well take the company private and see what can be done without the public glare of a quarterly financial reporting period. And by not putting up another dime of new money into the go-private proposal, Fairfax shareholders aren’t risking any more capital on a BlackBerry turnaround than they had exposed, say, six months ago.

Whether or not that key fact should support the confidence of the pensioners who are being asked to finance the balance of the equity needed to make the deal happen is another thing.

I’m glad that Prem Watsa has been in discussions with BlackBerry co-founder Mike Lazaridis, if the media reports are true, as I think Mike’s connection to BBRY as an enterprise offering could help with the announced return to a corporately-focused service offering. Catherine and I talked about that weeks ago on BNN’s Business Day show, and Mike’s presence could add to the attractiveness of the pitch being made right now to CPPIB, Teachers, CDP and HOOPP. According to my market pals. AIMCo and PSP have made it clear that they’re not playing, and I’d be stunned if OP Trust or OMERS came on board the Fairfax bid, either. OP Trust is keen on predictable cash flow and OMERS just walked away from Public Mobile.

As high profile as the situation is, as takeover bids go, this one is incredibly unusual for two reasons. First, the Class Action lawyers will have a hard time believing there was no coordination between the company’s 3pm Friday announcement of a $1 billion writedown and 4,500 layoffs with the noon Monday takeover proposal. Barely four market trading hours separated the two events. You can just hear the plaintiff lawyers now: “Fred Astaire and Ginger Rogers had nothing on these two.”

More importantly, unlike a “stalking horse bid” in a bankruptcy action, there is no BlackBerry bid today. There is no actual floor to the auction, as much as some commentators might claim. The current bidder isn’t stuck with the deal if no one else shows up to the party, unlike a true Stalking Horse proposal. There’s merely the premise of a bid in exchange for a break fee. And the premise of a bid existed immediately after Mr. Watsa stepped down from the BlackBerry board last month.

One can understand why Mr. Watsa wanted to add some momentum to what appeared to be a lethargic auction. But an unfinanced LOI isn’t going to fool any serious buyer. I don’t think Microsoft will suddenly try to top him at $11/share. If they want the company, they now know they can buy it for in and around $9.00 a share. The BlackBerry Board has telegraphed that figure. Perhaps that’s the new reality, but to think that’s the outcome for a company that was once (just like Nortel) the most valuable publicly traded company in Canada.