Many BlackBerry Limited (BBRY) longs are holding their stock and hoping. They are hoping that Fairfax Financial (OTC:FRFHF), which submitted an all-cash bid for the company at $9 per share, is "topped" with a higher priced bid. This article will briefly show why no such topping bid will materialize.
On September 23, 2013, Fairfax and BlackBerry entered into a Letter of Intent ("LOI") which provided the heads of the agreement for Fairfax to buy 100% of the BBRY shares at a price of $9 per share. The LOI is subject to due diligence and financing. Fairfax already owns almost 10% of BBRY and has stated that it will not be increasing the size of that position. More on that LOI, and how it is very favorable to Fairfax can be found here.
Fairfax Is Really Acting As BlackBerry's Investment Banker
On August 12, 2013, BBRY put out a press release informing the public that the board had "formed a Special Committee to explore strategic alternatives to enhance value and increase scale in order to accelerate BlackBerry 10 deployment. These alternatives could include, among others, possible joint ventures, strategic partnerships or alliances, a sale of the Company or other possible transactions." That press release also stated that JPMorgan (JPM) had been appointed financial advisor to the Company and further that Prem Watsa, BBRY board member and CEO of Fairfax would "resign due to potential conflicts that may arise during the process." From that point forward it became game-on, BBRY was in play, JPMorgan was the banker and Fairfax a potential bidder.
But on September 23 when the LOI was signed, effectively that changed the game. JP Morgan became the banker in name only, the real banker that any bidder was now going to deal with was Fairfax. With only a 10% stake, which was not going to increase, Fairfax had to find buyers for 90% of the company. Finding buyers is the job of an investment banker. Fairfax is not looking for partners to help it take control of BBRY, it is looking for some other party to take control of BBRY and allow Fairfax to stay along for the ride in a minority position. Once that LOI was press-released, any potential bidder is now going to talk with Fairfax, who possesses deep inside knowledge of BBRY and has established very favorable deal terms in its LOI.
$9 Per Share Has Now Become A Ceiling, Not A Floor
No potential bidder is now going to go to JPMorgan, whose job it is to find someone to pay more than $9 per share. Any potential bidder will go to Fairfax who has established a price already accepted by the BBRY Board. What possible benefit can JPMorgan bring to a bidder that is better than what Fairfax can bring? The answer is nothing. JPMorgan can only make the bid more expensive. Fairfax has also negotiated attractive break fees and cost recoveries as a part of their LOI. The failure of the Fairfax bid to become a true and effective stalking horse bid is the failure of Fairfax to have enough skin in the game. At 10%, without financing in place, their bid lacks sufficient credibility. The market is saying this by placing an 11% spread (at time of writing) from the stock price to the Fairfax bid price.
Since Fairfax does not have financing for the balance of the 90% of the shares, no potential bidder needs to compete with them; they can simply partner with them. Potential strategic bidders exist in names such as Lenovo Group Limited, Microsoft (MSFT), Dell (DELL), and founder and former Co-CEO Mike Lazardis. If they seriously want BBRY, why compete against Fairfax and pay a higher price, why not join them at $9 and still control the deal?
A "Take Under" Is Still Possible
It remains quite possible that a deal could get done at less than $9 per share. A well financed bidder could present the BBRY Board and ultimately the BBRY shareholders with a firm, no subjects, all-cash bid of something less than $9, perhaps $8, given the current market and have it accepted, based not upon price but upon certainty of closing.
The BlackBerry Board Has Done A Disservice to Its Shareholders
It is my belief that the BBRY Board of Directors did its shareholders a great disservice by backing the tenuous Fairfax bid. By accepting their bid with only 10% of the money in place they have opened the door for other bidders to become the financier and partner for Fairfax as opposed to a competing bidder. Their strategy of using an unfinanced bid as a floor has back-fired and become a ceiling, making it highly improbable for any topping bid to be received.
The Board's timing of accepting the Fairfax bid could not have been worse. Only days before, BBRY came out with pre-announced Q2 earnings that can only be described as a disaster. Massive inventory write downs were taken. 40% of the workforce was slated to be terminated. BBRY was at its very weakest, a terrible time to accept a bid. Much of the analyst community had done a sum-of-the-parts valuation of BBRY and while the range was wide, $17 per share seems close to the median. That is a long way off from $9. (Incidentally, $17 is also Fairfax' average cost.) Would the BBRY Board have better served its shareholders by waiting to demonstrate any positive effect of their enormous layoff before accepting a bid? Or to see if any of that inventory stuck in the channel could be sold off at a discount, thereby reducing the write-down and adding back income in subsequent quarters? It is easy to second guess from the sidelines, but it seems to me the Board could not have picked a worse time to accept a low-priced bid with subjects. In doing so, I believe they have virtually assured their shareholders will get no better than $9 per share.