BlackBerry (BBRY) shares have taken another dip, now 15% below Fairfax's indicative offer price of US$9, showing just how nervous investors are about Prem Watsa, Fairfax's Warren Buffett-like CEO, and his willingness to follow through with the deal. While the deal is still not concrete, and we speculate whether a formal offer will materialize, I think it's instructive to look at Prem Watsa's history in a somewhat similar situation.
Take a look at Fairfax's investments in The Brick, a large Canadian furniture and electronics retailer. Fairfax started accumulating shares in The Brick, at that time listed on the TSX as an income trust, in 2006 (first filed for over 10% stake April 3, 2006). At this time, things were smooth sailing for the retailer. In 2007 for example, The Brick reported 10% overall revenue growth, 6.4% same-store sales growth and 18.7% growth in cash flow (EBITDA). Fairfax then reported on November 6, 2008 an increased stake of 17.52%. As the financial crisis reached its peak, Fairfax announced January 9, 2009, that it had increased its stake in The Brick to 19.52%. But what a difference a year makes, on March 18, 2009, The Brick reported 2008 results with negative 3.6% same-store sales growth, and a drop in EBITDA of 14.2%. With the company facing a liquidity crisis of its own, on May 7, 2009, Fairfax announced it would back-stop a refinancing of The Brick, putting in a further $40 million, plus up to $25 million additional if a public debt offering were to fail. This brought Fairfax's stake, assuming full exercise of warrants, to 51.37% (on May 11, Fairfax announced an increase of $5 million to its commitment, and its potential position became 53.8%).
The year 2009 was even tougher for the Brick, with same-store sales down 20% and EBITDA down 51.9% for the year. However, despite the combination of intense competition and a global recession cutting the cash flow of the business in half, Fairfax further increased its position, announcing in August of 2010 that through market purchases of equity units, its stake is up to 59.3%.
While The Brick slowly climbed its way back to positive results, the real reward for Fairfax came on November 11, 2012, when Leon's Furniture, another Canadian retailer, announced an agreement to acquire the Brick at $5.40 a share. This represented a 62% premium to the 20-day average trading price for The Brick at that time, and a whopping 162% premium over the $2.06 that Fairfax paid when it last increased its stake in the company in August 2006. The Leon's deal closed in March 2013.
What does this history lesson tell us about Fairfax and Prem Watsa:
- Patience is key - Fairfax held shares in a struggling retailer, through brutal competition and a global financial crisis for seven years.
- Commitment - when things went from bad to worse for the Brick, with cash flow declining over 50%, Fairfax stepped up and bought more of the company.
- Risk tolerance - as evidenced by The Brick's revenue and cash flow swings, this was a volatile business, not unlike the global handset market. Furthermore, during the crisis The Brick reported EBITDA losses, and never had a cash-rich balance sheet like BlackBerry.
Now arguably the BlackBerry proposed privatization is much different case, being a far larger transaction and the communication device industry subject to issues of technological obsolescence that are not faced by a retailer. However, alternately one could say the global economy is far stronger now than when Fairfax was investing in the struggling retail sector, and while BlackBerry has faced similar revenue declines, it still enjoys a cash-rich balance sheet that was never the case at The Brick. Furthermore, this deal, unlike the far smaller retail investment, has the eyes of the global investment community on Fairfax, and Prem Watsa will want to show his ability to close a deal to ensure he can negotiate future transactions.
Prem Watsa has been on the board of BlackBerry since January 2012, he has overseen the replacement of the CEO, endured product delays and write-downs, watched the stock fall with disappointing financial results. It strikes me there is nothing new here that he could not have anticipated, or been outside of his typical 3-5 year investment horizon. For those betting against the deal, I suggest having confidence in Fairfax, look at case of The Brick, and take your focus off BlackBerry's quarterly results.