BlackBerry Shareholders Must Feel Like A Punching Bag

| About: BlackBerry Ltd. (BB)
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Who'd have thunk it? The Canadian tech auction of the century has been pulled and CEO Thorsten Heins has been dismissed. So much for Fairfax's (OTC:FFXLF) $9 offer providing "certain value for BlackBerry (BBRY) shareholders" and the Board's confidence in the CEO heading up the company's go-it-alone strategy.

In some ways, it was all very predictable. This is from my post "BlackBerry: don't bet on a frothy, 'quick auction'" (Sept. 5-13):

News report: BlackBerry Ltd. has already held talks with potential bidders in what it hopes will be a quick auction (WSJ)

It was only a few weeks ago when I sold my personal RIM shares following a month with the underwhelming BlackBerry Q10. My "canary in the coal mine" blog post about why selling my stock caused quite the ruckus with the "longs". At that time, BlackBerry CEO Thorsten Heins was incredibly positive about the channel takeup of the Q10. I wasn't so sure that could be true, based upon my own heartfelt experience with the much-anticipated handset. The longs over at Seeking Alpha were sure I was a tool of NY hedge funds who were short the stock, and gave me both barrels for my "stupidity" to sell for a loss at C$ (Canadian dollars) 14.60, right before RIM's quarterly results were going to be released. The results and guidance were crappy, and the stock fell to below C$10.

A few weeks later, the company was up for sale. The channel didn't like the product, the BlackBerry Board couldn't ignore the feedback, and I'd say my experience was indicative. Much like a Hollywood movie, if the buzz is bad, your neighbours don't head out to see the show and the curtains are quick to come down.

According to the Journal this am (which continues to provide fabulous coverage on the company's travails), the sale is going to be a quick one. I'd caution investors who bid up BBRY shares another 3% this am on that storyline, since every motivated seller hopes for a quick sale. It's not that the journo got the story wrong, I'm just not sure his source can control the outcome.

When you are trying to sell a company with some alacrity, the longer it takes the lower the price usually goes. Since time doesn't appear to be on BlackBerry's side, and some enterprise customers are holding off their 9900 Bold-Q10 upgrade until they see how this all plays out, its only natural that BBRY's investment bankers are pushing for an early September deal.

I'd have thought that Microsoft (NASDAQ:MSFT) was a candidate for the data room, but their play for Nokia's (NYSE:NOK) handset business earlier this week can't be good for BlackBerry's auction dynamic. Particularly if both Samsung (OTC:SSNGY) and Silver Lake are being sincere when they say they're not interested. Oh for the days when Analyst Peter Misek, now of Jefferies, tried to convince the TV world that "Microsoft had a standing C$50 offer" for RIM. That leaves China (Lenovo (OTCPK:LNVGF)), Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), and price-sensitive PE turnaround artists such as Gores Group and perhaps a few stray cats to burn the midnight oil in the dataroom.

Canaccord Genuity (OTCPK:CCORF), which already had a sell on the stock and an $8 target, lowered its BBRY estimates this morning based upon "soft BB7 and B10 sales and high channel inventory levels".

Even though the For Sale sign is finally up, I'm not sorry to miss this final, sad chapter.

It was just a few hours ago that we all had been led to believe by so-called well-placed media sources that firms such as Cerberus and Lenovo were still keen to pursue a bid for BlackBerry. Indeed, on Friday night, the Wall Street Journal offered this up:

In the latest development, Mike Lazaridis and Doug Fregin, who co-founded the company in 1984 but no longer work there, have been in talks to mount a joint bid with mobile-phone chip maker Qualcomm Inc. (NASDAQ:QCOM) and Cerberus Capital Management LP, according to people familiar with the matter.

It made sense, in a way. Mike was interested in finding a path forward and had an 8% stake to tender, and Cerberus was kicking the tires (see prior post "As BlackBerry shares swoon, a different kind of buyer emerges" Oct. 3-13). But, when Cerberus' name first hit the press, I was dubious that they'd ever pay up for the company (from my Oct. 3rd blog):

So, it has come to this.

The share price of BlackBerry has dropped so low, despite the C$9 Fairfax LOI, that distressed players from the private equity space are asking for access to the dataroom (H/T WSJ). I can see why the market pushed BBRY up once the news broke, but I'd recommend against ordering any champagne on the news.

As much as some in the media think buyers are "warming to the idea" of acquiring Blackberry, make no mistake. This is about getting a deal. Where were these "buyers" 18 months ago when Goldman Sachs had the strategic alternatives mandate and BBRY shares were at C$18? Or even six months ago when the mobile industry was tickled with anticipation for the new Q10? Again, BBRY shares were in the C$17-18 range.

These buyers are only now raising their hand in the wake of what appears to be a weak Fairfax proposal, and a 50% drop in the share price post the Q10 launch. A deal may actually happen, and I-bankers will see their M&A fee, but don't expect this new cohort to overpay for the asset.

That's just not what they do.

As for Lenovo, the consent of the Federal government always hung over that potential bid (see prior post "Can't ignore Lenovo's interest in RIM" Jan. 24-13), and I can imagine why the BlackBerry board didn't want to pursue something that might never come to pass in light of what happened at Allstream.

Which, in the absence of strategic interest from Microsoft, Cisco, etc., left the BlackBerry board at the mercy of Fairfax. And that's exactly how it looks, in hindsight.

The company tested the M&A market, but nothing firmed up. Fairfax tried to swing a take-private, but couldn't raise the financing, despite having told BlackBerry shareholders in September that Fairfax had "more than they need" to make the bid work. This from the Globe on Sept. 26th:

"We've got a track record of 28 years of completing what we've done," Mr. Watsa stressed in an interview with The Associated Press.

"We've never renegotiated."

The interview was among a couple with various news organizations as Mr. Watsa moves to convince investors he will pull off the deal for BlackBerry, which is expected tomorrow to post a second-quarter loss of almost C$1-billion.

Here's what he told The Associated Press: "We thought long and hard before we offered C$9 a share and we're not in the business of offering a number and at the last minute changing the figure … Rest assured when we do this it won't be done to split the company."

To Reuters: "We wouldn't put our name to such a high-profile deal if we didn't feel confident that at the end of the day that our diligence would be fine and we'd be able to finance it … Short term these things fluctuate, there is speculation one way, there's speculation the other way. We never pay too much attention to the marketplace.

Mr. Watsa said Fairfax won't put in anything more to the offer than the 10 per cent of BlackBerry it now owns.

"The 10 per cent is like C$500-million," he said.

"It's a significant amount of money. We're going to bring equity partners and we think the company will be very well capitalized."

And yet, despite the CBC headline "Fairfax says BlackBerry deal will go through" of Sept. 26th, I didn't feel quite as confident about the Fairfax proposal, to say the least (excerpt from Sept. 24th blog):

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.

To his credit, Mr. Watsa isn't throwing in the towel. Fairfax is lending BlackBerry C$250 million as part of a C$1 billion private placement of 7 year 6% unsecured convertible debenture offering that will close in 14 days. Perhaps these debt investors are the same ones he thought would partner with him on the C$1 billion of equity required to support his C$4.7 billion take-private proposal, but for the C$3.7 billion of bank financing that never firmed up.

With C$8.5 billion of net assets as of the last quarterly report, of which C$3.3 billion was cash and short term investments, I'm not sure BBRY shareholders will understand the urgent need to raise more capital at this precise moment. Even with a C$10 conversion price on the convert. The Board had already been cutting costs as fast as they could (see prior post "BlackBerry moves suggest M&A process failing to produce a strategic buyer" Sept. 23-13) as they prepared for all potential outcomes. A wise decision, even if it unintentionally telegraphed six weeks ago that the auction process was floundering.

For having more patience than me (see prior post "Throwing in the towel on my RIM shares part 2" June 26-13), BlackBerry shareholders may suffer as much as 20% dilution should the turnaround eventually succeed. As for the famous line about "certain value for shareholders" being just around the corner, there's anything but that now.

If the C$1 billion of new cash will keep the wolf from the door long enough to turn things around, it all will make sense; at last count BBRY has 6 or 7 quarters of cash left - but that was before the recent cost cuts. However, if the convert offering was merely done to send a message of confidence to Blackberry's enterprise customers, shareholders must feel like a punching bag.

Disclosure: This post, like all blogs, is an Opinion Piece