BlackBerry Was Just Kidding About Someone Buying It

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By Matt Levine -             Nov 4, 2013, Bloomberg

You have to admire BlackBerry's tireless efforts to put a brave face on things. In September, after announcing disastrous earnings and firing a third of its employees, BlackBerry had the bright idea of telling everyone that Fairfax Financial Holdings was going to buy it at $9 a share. That was sort of in the ballpark of maybe being kinda true, but it depended on Fairfax (1) getting financing and (2) not coming to its senses. Fairfax had until today to come to its senses and guess what?

BlackBerry Ltd. abandoned plans to sell itself and began searching for a new chief executive officer after a $4.7 billion takeover plan collapsed, sending shares of the struggling smartphone maker plunging.

Fairfax Financial Holdings Ltd., BlackBerry’s largest investor, walked away from its bid for the company, opting instead for a $1 billion bond deal and a management shakeup.

But the official announcement from BlackBerry is downright chipper:

“Today’s announcement represents a significant vote of confidence in BlackBerry and its future by this group of preeminent, long-term investors,” said Barbara Stymiest, Chair of BlackBerry’s Board. “The BlackBerry Board conducted a thorough review of strategic alternatives and pursued the course of action that it concluded is in the best interests of BlackBerry and its constituents, including its shareholders. This financing provides an immediate cash injection on terms favorable to BlackBerry, enhancing our substantial cash position."

So I mean obviously the vote of confidence here would be for Fairfax to buy the company like it said it would. Walking away from the deal is a vote of significantly less confidence, which is why the stock is down more than 10 percent today. Instead of raising $4.7 billion to buy the company, Fairfax is raising $1 billion -- only $250 million of which is its own money, the rest coming from co-investors -- to buy into the company in a senior position. Fairfax will still get equity upside above $10, the conversion price of the bonds, but it's ahead of the common shareholders if BlackBerry ever goes bankrupt which, I mean, you know, at some point that is a thing you might want to talk about.*

Also Fairfax Chief Executive Officer Prem Watsa will be lead director of BlackBerry, and BlackBerry will replace its CEO, Thorsten Heins, with a new interim CEO "pending completion of a search for a new Chief Executive Officer" that will presumably be led by Watsa.

So instead of stumping up $4.7 billion in its own and others' money to buy BlackBerry, taking all of the equity upside and downside and controlling the company, Fairfax will stump up $1 billion of its own and others' money -- only $250 million of its own -- to take a lot of the equity upside, little or none of the downside, and basically control the company. That is a much better deal for Fairfax: It gets most of the benefit of buying BlackBerry, with considerably less of the risk.**

But of course, at this point, what could BlackBerry do? It had announced its deal with Fairfax, subject to due diligence. (Though: What else could it do then either?) Nobody else was clamoring to buy BlackBerry, in part I guess because of the $157 million breakup fee that any competing buyer would have to pay Fairfax. (But mainly for the same reasons that Fairfax and its lenders weren't clamoring to buy BlackBerry either.) If the Fairfax deal fell apart in diligence -- if even BlackBerry's very publicly announced savior wanted nothing to do with it -- that would be, um, a bad sign. The sort of bad sign that would scare away customers and potential financing sources. At least this deal solves the financing-sources problem, or $1 billion of it anyway, and generates a chipper press release for the customers.

A useful question to ask is: If, after earnings in September, Fairfax had approached BlackBerry and offered this deal, what would the company have done? I suspect $1 billion of senior investment at onerous terms would not have been that attractive back then: BlackBerry wanted to sell. So Fairfax offered BlackBerry, not a deal to sell the company, but the next-best thing, a sort-of-deal to sell the company, which at least allowed it to put out a cheerful press release. But which also turned into leverage to get this much better deal for Fairfax. Which BlackBerry couldn't really say no to. The priority remains on the cheerful press releases.

* Also "an immediate cash injection on terms favorable to BlackBerry"? Maybe? It's a 7-year bond with a 6 percent coupon that Fairfax can convert into stock at $10 a share. Another mobile-phone maker that you might remember from the 1990s, Nokia, happens to have a 6ish-year bond outstanding (CUSIP 654902AB1, rated B1/B+) that trades at about a 4.7 percent yield. So BlackBerry's bond is considerably more expensive and is convertible.

** "Much better deal" is importantly distinguishable from "good deal." If BlackBerry goes to zero they will still be sad, though there's a lot of cash, maybe the bonds will have a decent recovery, I dunno.

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By Hugo Miller -             Nov 5, 2013

Investors are no longer wondering if BlackBerry Ltd. (BBRY) will run out of cash. For some, it’s now a question of when.

The struggling smartphone maker embarked on a plan to raise $1 billion in convertible debt yesterday after the collapse of a $4.7 billion buyout deal. While the effort gives a cash infusion to the company, the move raised speculation by analysts and investors that its money is disappearing quickly. BlackBerry shares plunged 16 percent yesterday, bringing their year-to-date decline to 45 percent.

BlackBerry’s cash shrank by almost $500 million last quarter -- a burn rate that would use up most of its $2.6 billion cash and investments by the end of next year. The company also has about $2.9 billion in purchase commitments due within 12 months, according to filings. The dwindling funds will put a heavy burden on BlackBerry’s comeback attempt, said John Stephenson, who helps manage about C$2.8 billion ($2.69 billion) at First Asset Investment Management Inc. in Toronto.

“It’s going to be very difficult to turn this around,” said Stephenson, whose firm owns some BlackBerry stock as part of exchange-traded funds. “They’ve lost so much ground.”

John Chen, the former chief executive officer of Sybase Inc., took the helm of BlackBerry yesterday, replacing CEO Thorsten Heins. As part of the shakeup, Fairfax Financial Holdings Ltd. (FFH) abandoned its plan to acquire the company, opting instead to become the lead investor in the bond sale. Fairfax, already the smartphone maker’s largest shareholder, will buy $250 million of the debentures, which can be converted into BlackBerry shares.

Seeking Stability
Chen plans to overhaul the company so it can survive in the long run -- rather than preparing it for a fire sale. Fairfax CEO Prem Watsa, who is rejoining BlackBerry’s board after spending three months trying to orchestrate a deal, expects the turnaround plan to bear fruit within a year and a half.

“We went with the idea that the next three or four or six quarters are going to be tough,” Watsa said in an interview. “We expect the cash to stabilize somewhere there and then pick up -- and finance it with enough cash to give us a long runway.”

Lisette Kwong, a spokeswoman for Waterloo, Ontario-based BlackBerry, declined to comment on the company’s cash management beyond Watsa’s remarks.

Heins’s Payout
Heins, who was CEO since January 2012, was in line to get a $22 million payout in the event of termination, including $16.1 million in stock, the company said in a proxy filing earlier this year. The shares have fallen about 50 percent since March, when the stock portion of the package was calculated. Taking into account that decline, Heins is now eligible for about $14 million. Adam Emery, a spokesman for BlackBerry, declined to comment on Heins’s compensation.

Chen successfully turned around Sybase, which he sold to SAP AG (SAP) for $5.8 billion in 2010. BlackBerry would present an even bigger challenge. After yesterday’s stock tumble, the company’s market value has fallen to $3.4 billion.

BlackBerry’s stock rebounded 2.7 percent to $6.67 at the close in New York after it was upgraded by analysts at Societe Generale (GLE), Deutsche Bank and MKM Partners LLC. Even so, it remains down about 95 percent from its 2008 peak, following years of losing ground to Apple Inc. and Samsung Electronics (005930) Co.

‘All-Out Sprint’
BlackBerry needed to move very quickly to keep up with a competitive smartphone market -- something that hasn’t happened so far, said Jack Ablin, chief investment officer at BMO Private Bank in Chicago, who helps manage $66 billion in assets.

“The company needed an all-out sprint to keep up in that business and BlackBerry was not running fast enough,” he said.

The $1 billion debt sale will help keep the company afloat, though it’s hard to say for how long, said Alexander Peterc, an analyst with Exane BNP Paribas in London.

“Whatever they do will cost them more cash than they actually have in the bank today,” Peterc said. “They’re basically extending their lifeline by a couple of quarters with this billion. Otherwise, they would have run out of cash probably in a year’s time.”

Poor sales of phones and related services -- along with rising inventory costs and large purchase commitments -- have made it difficult for BlackBerry to find a buyer, said Michael Walkley, an analyst with Canaccord Genuity Inc. in Minneapolis. That’s why the company was forced to adopt the debt sale and management change as a Plan B, he said.


Right Mix
Chen, 58, said he sees a lot of assets inside BlackBerry -- its enterprise software, network, patent portfolio and instant-messaging application -- that could be better exploited.

“The question is: Could we actually pool these pieces together and differentiate ourselves in the market?” Chen said.

One way to stem BlackBerry’s cash burn would be to shut the unprofitable phone-manufacturing business and focus on selling software for managing devices, said Anil K. Doradla, an analyst at William Blair & Co. in Chicago.
“It’s a recurring business model, and more importantly, it’s a higher-margin business because they don’t build hardware platforms,” Doradla said.
Asked if he might close the handset business, Chen said he isn’t ruling anything out.

“I’m more focused on making sure our businesses are healthy and growing,” he said.

When Chen joined Sybase in 1998, the Dublin, California-based software maker was in the midst of a restructuring, had announced plans to cut 10 percent of its workforce and was trading near a record low. When he sold it to SAP, the price was more than six times higher.

BlackBerry’s odds of a fairy-tale ending look tougher, Stephenson said. He sees the company heading down the same path as Palm Inc. That company failed to turn itself around and was sold in 2010 to Hewlett-Packard Co. (HPQ), which discontinued Palm’s products.

“This is becoming a Palm Pilot of Canada,” he said.