The US$4.7-billion deal to take BlackBerry private is dead. The company’s attempts to find buyers failed. And despite a cash injection from Fairfax Financial Holdings and other unnamed parties, the company’s future is more uncertain than ever.
The company’s strategic review, launched in August, resulted in months of frenzied rumours about potential bidders, ranging from co-founders Mike Lazaridis and Doug Fregin to Facebook, and it ultimately turned up no worthwhile offers. Fairfax, led by renowned investor Prem Watsa, also nixed its proposal to take BlackBerry private at $9 per share. Instead, it will lead a $1-billion investment through convertible debentures. Fairfax is kicking in $250 million; the other investors have not been named. Watsa is returning to BlackBerry’s board as lead director, and CEO Thorsten Heins is out. John Chen, former head of enterprise-software and services company Sybase, will serve as interim CEO.
When Fairfax’s initial transaction was announced in September, the company hadn’t yet secured financing. The fact that Fairfax, which owns a 9.9% stake in BlackBerry, is changing directions suggests it couldn’t find others willing to participate. “The outcome was always dependent on Prem Watsa and Fairfax’s ability to be good salespeople,” says James Faucette, an analyst at Pacific Crest Securities. “They weren’t as successful as they thought they could be.”
Watsa, in subsequent interviews, denied he couldn’t find partners, saying Fairfax decided it wasn’t wise to saddle BlackBerry with high-yield debt after completing due diligence. It is unclear, however, what exactly Fairfax learned about the deeply troubled company it didn’t already know when putting together the proposal.
Watsa’s additional investment is actually a fairly cautious one with limited downside. Fairfax will receive a 6% coupon on its $250 million investment, and if the company’s share price hits $10 (it’s under $7 now) the debt can be converted to equity. Even in the worst-case scenario—bankruptcy—Watsa is well positioned to be compensated.
The big question now is why BlackBerry’s board believes a new CEO will be any better at trying to reverse its decline, especially after writing down nearly $1 billion in inventory and reporting a $965-million loss last quarter. The appointment of Chen, who has an enterprise background, suggests the company will focus even more heavily on producing smartphones and offering services to its core group of business users.
But if that was a difficult job before, it’s even tougher now. “It’s bad for BlackBerry if they have to stay public,” says Mike Genovese, an analyst at MKM Partners. Going private would have allowed the firm to make changes without the demands placed upon publicly traded companies, away from the scrutiny of the media and investors. As well, the lack of interest from buyers signals there is little faith in BlackBerry’s future. What corporation would want to buy new BlackBerry products and services when there is so much uncertainty around the company?
The cash injection gives BlackBerry more time to work through these problems, but perhaps not much. As of last quarter, it still had $2.6 billion in cash on its balance sheet. Heins, though he couldn’t turn the company around, was nonetheless adept at cutting costs and finding money. The concern remains that the more its business deteriorates, the faster it will burn through its remaining funds. As a result, Faucette expects further layoffs at BlackBerry on top of the 40% reduction in its workforce already announced in September. “There is no more money after this,” he says. “They’ve got to make this last not just a couple of quarters, but forever, until they can turn the company around.”