Watsa's White Knight Orchestration At BlackBerry

| About: BlackBerry Ltd. (BBRY)

After our last article here on SA, we have done a lot of thinking about what happened at BlackBerry (NASDAQ:BBRY) on Monday November 4th, the expiration of the due diligence period for Prem Watsa's Fairfax Financial to buy BBRY for $9 a share. In a vastly different view from our previous stance about Watsa and his actions over the last several months and also juxtapositioned to fellow SA author Edward Vranic in his recent article, we think Prem just did all BBRY shareholders a major service by putting in a $1 billion backstop in cash for the new management team being led by turnaround expert John Chen. Chen is known for his turnaround at Sybase where he turned a 'basket case' company into an enterprise mobility juggernaut and then successfully sold it to SAP. Prem Watsa seems to have recruited Chen with a 'whale sized' pay package which is designed to reward success, and in doing so, it appears BlackBerry has finally found what it needed: an insider leading the company like a no nonsense owner who is willing to put his and fellow investors' money where his mouth is and take the potential heat and liability or credit for doing it. As evidence that there is still a possible bid from a third party bidder as reported here on SA for likely a premium to the current BBRY share price, it's important to note that this apparent activity has prompted Fairfax's break-up fees originally seen in the $9 takeover bid to resurface in the multi-investor $1 billion convertible security with color given here by Reuters:

Fairfax, led by investment guru Prem Watsa, had said it was investing $250 million in the offering.

In its filing on Thursday, BlackBerry said Canso Investment Counsel Ltd is investing $300 million in the offering, while Mackenzie Financial, Markel Corp, Qatar Holding, and Brookfield Asset Management are buying the remainder.

As part of the financing deal, BlackBerry has agreed to pay a fee to the investors if it does reach an alternate deal that results in the sale of the company, either before, or within 30 days of the close of this deal.

Depending on the circumstances, the fee could range between $135 million and $250 million.

The investors have also pledged to a standstill agreement, for a period of one year, that restricts them from owning more than 19.9 percent of the company's outstanding shares, a move likely aimed at preventing any creeping takeover of BlackBerry.

We are seeing the difference in operating style from recently ousted BBRY CEO Thorsten Heins and Chen taking effect almost immediately as demonstrated by his BlackBerry Townhall meeting this week. He is quoted as saying, "'I'm here, I'm going to listen to you. Whatever we do, we have to make money. There are lots of assets here, we'll figure it out together … I've got some ideas already, but I'm not going to go with preconceived notions.'"

Our take is that Watsa sees money to be made in fear using Twitter as an example, he is also quoted from the same article as saying,

"When there's fear it's difficult to raise money," Mr. Watsa says. "The marketplace is driven by greed and fear. Greed you can see in Twitter and fear you can see in BlackBerry."

Perhaps what's driving the confidence in Watsa is the raging Twitter (NYSE:TWTR) IPO success this week that saw TWTR shares nearly double from its debut price of $26 per share. BBM which recently went cross-platform to iOS and Android and is free to use (for now) is apparently very 'sticky' as Mobidia says "BBM's engagement time was 40 minutes in the United States ... BBM seems to be doing better in European markets with 59 minutes vs. LINE's 38 minutes. In Europe, WhatsApp has an engagement time of 160 minutes trouncing them all."

WhatsApp is clearly the elephant in the room in the SMS "in drag" messaging space, but that could change as they only offer free service for the first year. We think TWTR broadcast service could easily be duplicated by these other platforms, but the offering must be done just right so as not to alienate current users. As we have written before and subsequently anticipated the lofty TWTR share rise, a $50 per user for a BBM user base of 80 million gives a $4 billion value for BBM alone, more than the current market cap of BBRY of ~ $3.6 billion.

The most recent short interest in BBRY shows a substantial percentage of the company's total outstanding shares using the ~ 550 million number. Here is a snapshot from Nasdaq:

Clearly, the shorts haven't exited and may have even increased their bet against BlackBerry's prospects after the announcements on 11/4. We will see what the short interest is after the market close on 11/11.

One development that has not been reported broadly regarding patents is the Rockstar Consortium's recently commenced litigation, which is nicely summarized in an article, which we quote here:

Google, Samsung, HTC and basically every major Android hardware manufacturer have been hit with a patent lawsuit from the Rockstar Consortium, a group jointly owned by the likes of Apple, Microsoft, BlackBerry, Ericsson and Sony based on patents acquired from the Nortel bankruptcy auction in 2011. The suits were filed last week in the U.S. District Court, Eastern Texas Division.

Clearly, the importance of patents and other IP has not waned in the smartphone industry as some have opined based on recent Whitehouse initiatives. BBRY could easily sell its IP portfolio including the Rockstar position, take a fully paid license for its own use and raise significant cash and simultaneously payoff any debt it incurs including the Fairfax led issue if need be.

Another BBRY critique we think has been overly highlighted, especially by Pac Crest's James Faucette, is the off balance sheet vendor obligations. We quote from SA:

Pac Crest's James Faucette (previous) argues today BlackBerry's $5.3B in off-balance-sheet purchase obligations (inc. $4.3B in purchase order commitments) will limit the company's buyout premium.

Normally, vendors work with long standing customers such as BBRY on terms, which are outlined in their purchase agreements covering specialized NRE (non-recurring engineering) costs. On popular items such as the Qualcomm (NASDAQ:QCOM) Snapdragon high ticket processor chips that BBRY uses, there is little to no cost to terminate those purchase commitments as the NREs are limited. The other components, such as customized covers and trim are lower cost items, which BBRY will most likely use over time.

We have shared some of the ways we think great revenue and profits can come out of the BBM service with BBRY in the past and hope Chen is true to his pledge that he and his new team are "all ears" to new ideas to make money. In the meantime, a long position here at BBRY given insider Watsa's deliberate and gutsy actions should be a lucrative investment.

Disclosure: I am long BBRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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