Many traders were blindsided by Fairfax Financial's Letter of Intent for BlackBerry (NASDAQ:BBRY) yesterday at $4.7 billion or $9 a share. After reading the details of the bid, I came to the conclusion that there is a good chance that it was thrown out there in an attempt to stimulate a superior bid so that Fairfax can relinquish their 10% stake in BBRY at a superior price rather than add the remaining 90% of the shares at the $9. There are four reasons that immediately come to mind.
1. The timing is very curious.
A lot of people believe that the warning on Friday was to help set up a take under bid. I'm of the opposite belief that after reviewing the warning by the company over the weekend, FFH made a hasty offer to avoid further erosion of the stock price. The bid was vague on details other than stock price and has a feel of being slapped together without much due diligence.
2. A serious offer would come with a serious price.
Prem Watsa, CEO of Fairfax stated that he believed BlackBerry is worth $40 a share just a couple of months ago. The stock price has been over $10 for most of the year and hit a high of $18. The vast majority of takeover bids are at some sort of premium to a weighted average of recent trading in the stock. This one is not. In my opinion a reasonably priced bid that could be taken as serious from someone as bullish on BBRY as the management of Fairfax has been in the past would have been in the $15 to $20 range.
3. The FFH deal encourages other potential bidders.
Another oddity of the LOI is that it practically encourages other bidders to come forward while Fairfax has a nice long due diligence period running until November 4. Yesterday's LOI reads more like a press release telling the market that there is an interested buyer for BBRY rather than that BBRY has been bought. Think about that. If you were bidding on an item in an auction would you advertise it all over the world to try and bid up the price or want it as cheaply as possible? Fairfax didn't issue a $9 a share starting bid so someone else could come in and offer $10 so Fairfax has to counter with an even higher price like $11. They want someone to come in at $10 to sell their 10% stake to that buyer.
4. The deal is subject to financing.
One of the major caveats to the deal is that it is subject to financing. The latest financials of Fairfax shows that the company has $6.7 billion in subsidiary cash and short term investments as well as $1.2 billion in holding company cash. If BBRY has $2 billion in net cash and Fairfax is offering $4.7 billion, wouldn't it be possible for them to bridge that $2.7 billion gap in the all-cash bid strictly from their coiffures if they really wanted to?
When I read about this deal I just think about how much it contrasts to the Verizon deal for Vodaphone's stake in the wireless business. They didn't say what they were going to do, they just went out and did it. They set up $61 billion in bridge financing then a record-setting bond offer. That is the activity of a company that is serious about its acquisitions.
Based off of these reasons, I feel strongly that this deal will not pass through after Fairfax has done their due diligence. I continue to hold my put option position in hopes that I am right.
Disclosure: I am short BBRY. 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.
Additional disclosure: I hold put options