Prem and BBRY?

[cogitator99]

From the Globe & Mail:

 

***

 

A shareholder pelted the Bank of Ireland’s top brass with eggs at the company’s annual meeting in June, 2011. The bank’s shares, which traded near €12 in early 2007, were closer to 11 euro-cents by early July. The Irish government already owned more than one-third of the bank and it looked like it was going to have to take control.

 

CEO Richie Boucher, prodded by the government, worked to keep the bank from becoming a ward of the state. On July 17, in a piece headlined “Poor old Richie,” the Sunday Times said “the chances of the bank raising €1.9-billion in new equity, and staying out of state control, range from slim to impossible.”

 

Within 10 days of that report, Fairfax Financial Corp., with a consortium of investors, agreed to inject about €1.1-billion ($1.5-billion Canadian at the time) into the lender, Ireland’s oldest bank. The 35-per-cent stake that they bought helped Bank of Ireland emerge as the country’s only lender to avoid nationalization. The deal was done for ten cents per share, and the stock has since more than doubled.

 

Mr. Watsa brings up the Bank of Ireland scenario to explain why he sees value in BlackBerry, and why he has no doubt that Fairfax will be able to pull off its preliminary $9-per-share bid for the troubled Waterloo, Ont.-based company.

 

While there are few similarities between a bank established by Royal Charter in the eighteenth century and an IT firm born in the 1980s, both had important roles in the economies of their respective countries and both were buffeted by industry upheavals that only the most prescient investors saw coming. Mr. Watsa, more than most other financiers, is willing to look at the bigger picture.

 

“I’m not underestimating their short-term problems,” he said in an interview. “I’m just saying to you that these things happen all the time. Richie Boucher told me that no one would lend the country of Ireland any money – forget the Bank of Ireland.”

 

Mr. Watsa, who keeps an analyst report in his office from the late 1990s that predicts that Apple could go bankrupt, is not gambling on returning BlackBerry to its glory days. He’s gambling on it being in a better position in the future than it is now.

 

“It’s a good company, it’s a good product. Otherwise nothing could help it,” he says. “Can it compete in the consumer market with Apple and Samsung and the Android? No, we think that’s very tough. But in the enterprise market they’ve got huge advantages.”

 

Fairfax and its unnamed potential equity partners have been given six weeks for due diligence on BlackBerry, and Mr. Watsa says a final offer will be presented by Nov. 4.

 

It was during a Berkshire Hathaway shareholder meeting in 2010 that Mr. Watsa, dubbed “Canada’s Warren Buffet,” met the person who would put Bank of Ireland on Mr. Watsa’s radar: Bill McMorrow, founder of Beverly Hills-based real estate firm Kennedy Wilson. In 2011, as the Irish bank foundered, Mr. McMorrow was negotiating to buy some real estate loans from the lender. He let Mr. Watsa know that he was impressed with Mr. Boucher, which prompted Mr. Watsa to follow up.

 

“We had a very, very tight timeframe to work with the government to get a deal,” Mr. Boucher recalls.

 

“I had a long conversation with Prem, talked about the company and what we were trying to do,” he says. “He said he’d like to think about it. We had another conference call for about four hours on the Saturday, and he rang me back in the afternoon and said that himself and his colleagues were coming over on Sunday...

 

“We could see very quickly, because we’d been talking to a number of people, that they were very experienced at doing due diligence,” Mr. Boucher says. “They pulled in resources from other people they knew to do specialized due diligence.”

 

“[Prem Watsa] said at the time, and to be honest I didn’t believe him, he said he could bring in some very heavyweight investors if the idea was good enough,” says Denis Donovan, a senior executive at Bank of Ireland. “And he was absolutely right.”

 

U.S. private equity funds and others had been looking at the bank, but most wanted the Irish government to backstop any potential investment to reduce their risk.

 

Mr. Watsa had Canadian Western Bank help with the due diligence, and over a period of about two weeks a team of people combed through the bank’s loan books and questioned its credit officers. The team came away believing that the bank, which had modeled its property portfolio based on Nevada’s property meltdown, had taken larger writedowns than even a worst-case scenario would have warranted.

 

Billionaire investor Wilbur Ross, known for turning around troubled companies, had already been active in the Irish banking sector, and Fairfax reached out to him. Together, the two groups sought out Fidelity Investments and the Capital Group, and the investment was made.

 

“Can you imagine that at 10 cents no one wanted it?” Mr. Watsa says. “Everyone who had put money into the Bank of Ireland until that time had lost money.”

 

“The market’s very emotional,” he adds. “You’ll find huge optimism when everything’s going well, huge pessimism when things are not working out as well. And what we say is the truth is in between.”

 

“If you read the press and you read these analysts, it looks like [blackBerry] is going bankrupt. And five years ago it looked like RIM controlled the world. And both views are wrong. It wasn’t one, we found out, and we’re suggesting to you with humility that the second one is wrong.“

 

Mr. Watsa claims BlackBerry’s customers are jittery because its fate is uncertain, but will feel more confident and start buying more once the deal is done.

 

“What we’re doing here is simply doing our due diligence to figure out what’s needed to finance it over the long term, and then raising the money to have a capital structure that will help the company over the long term,” Mr. Watsa says, adding that the company won’t have too much debt.

 

“We want BlackBerry to survive for a long time,” he says. “Which means that it needs to have a very sound capital structure, and we’re going to focus on making sure that that takes place.”

 

[CassiusKing1]

:o

 

http://money.cnn.com/2013/10/02/technology/enterprise/blackberry/index.html?hpt=hp_t2

[Guest wellmont]

sounds like preparing shareholders for the coming take under.

[fareastwarriors]

http://online.wsj.com/article/SB10001424052702304906704579111391607572748.html

 

BlackBerry Draws Interest of Cerberus

[wknecht]

How much of Prem's time do you suppose this situation is consuming?

[Phaceliacapital]

From BW

[cogitator99]

How much of Prem's time do you suppose this situation is consuming?

 

The bulk of it, likely. Given the public declaration and all.

 

To do something so publicly and have it fall apart is probably not an option -- if he can help it.

[dartmonkey]

Question for this board: It seems that Watsa has offered $9 a share and proposes that a consortium of private investors, including Fairfax, take the company private. In the event that Blackberry accepts another offer, Fairfax would get a 'breakup fee' of 30c a share, i.e. $157 million. But Watsa has also stated that he will not increase Fairfax's stake above the current 10%. So two questions about this deal have been bugging me:

 

1. Does this essentially mean that Watsa is proposing to his investing buddies (like Wilbur Ross) that they take out the other 90% of the company's shares, at $9 a share, while he contributes his (ours), currently trading at $8 a share? Or would it be customary for someone in his position to offer to pay the same price as the other investors ($9 a share) ?

 

2. How does it make sense for Fairfax to obtain a breakup fee of 30c a share (or $3 per BB share that Fairfax owns) in the event of a better offer, given the fact that Fairfax can back out of this agreement with no penalty? This seems almost too sweet to be true. I suppose the answer is that beggars can't be choosers, but this would almost seem to open Blackberry up to a shareholder suit, it seems so outrageous.

 

Any help with answers to either of these questions much appreciated.

 

[Lazarus Long]

1. He is proposing a leveraged buyout. Fairfax will contribute its 10% equity stake to a newco buyer in exchange for equity in the newco. That's $470 million of the $4.7 billion purchase price. I suspect he'll also get Mike Lazaridis on board, which is another ~6%. The bulk of the money will be bank debt. See the multiple Globe and Mail (and other) articles suggesting that PW wants to put $3 billion in bank debt on BBRY. That leaves another $1 billion in new equity that PW needs to raise from financial sponsors, pension funds, strategic partners or other institutional investors. The press reports indicate that pension funds have been lukewarm on investing in this unless a strategic partner is also involved, but that PW has been surprised at the PE interest in this transaction. Someone is going to have to bring management talent, as that is one aspect that is missing in this deal as compared to a traditional MBO, and that's what is apparently making the pension funds uncomfortable. At the end of the day, the newco buyer will have $750 in rollover equity from Fairfax and Lazaridis (or other consortium members), $1 billion in new cash equity from another source and $3 billion in bank debt. It will use that money to pay all of BBRY's current shareholders (other than the consortium shareholders) $9 per share in cash. These, of course, are rough numbers and the consortium will probably want to raise a bit more to make sure BBRY's financial position is strong (though more highly leveraged) after the buyout. Fairfax would end up owning more than 10% of the equity of a more highly leveraged BBRY.

 

2. It does not make a ton of sense and is completely unheard of to agree to a break-up fee in such a highly conditional offer. The only real explanation is that the special committee of the board thought that it had no choice but to agree to this, but it sure seems like a sweetheart deal for a former board member and Canadian investing superstar. BBRY is/was in a dire situation, but given its cash position and lack of debt, it wasn't exactly on the brink of insolvency. This decision could (read: will, at least it would in the U.S.) expose the special committee to litigation, though if this was a Delaware corporation rather than a Canadian company, I believe that Delaware law would respect the special committee's judgment in this matter. BBRY had previously explored strategic alternatives and was unable to find a buyer in that very public process, so it's not as if this was a hot asset over which many potential buyers were fighting. I suspect Skadden and Torys have looked closely at this issue. A second explanation (which is not mutually exclusive with the first) is that the special committee took PW at his word and believed that (notwithstanding the conditions in the LOI) PW would be there on November 4 with committed financing to sign a definitive agreement with a $9 per share cash purchase price. I believe (as do others on this board) that PW will do what he says he will to avoid damaging Fairfax's "brand". As cogitator99 mentioned on the previous post, it doesn't seem like PW/Fairfax can let this fall apart now. I bought a few shares earlier today for the arb based on this thesis. Do your own DD, as this could be flat-out wrong. I know that some people hold the opinion that Fairfax could simply lower its offer to $7 or $8 (pick a number) and close that deal and its brand/reputation would not take too much of a hit as the deal would still be remembered as a deal that saved an iconic Canadian company. I think the breakup value is conservatively $5 per share (others on the BBRY thread would disagree), so I don't think there is much more to lose here and I think PW's reputation and Fairfax's fair and friendly acquisitions brand is worth more than the possible savings that would be achieved from a lower purchase price. Many arbs will be unwilling or unable to take a position without a definitive agreement, so the "spread" (hard to call this a true spread without that definitive agreement) is likely to stay pretty wide unless there is a leak about a higher bid.

 

As an aside, this does not seem to me like a Warren Buffet-like move. I believe that if WB wanted this asset, he would have signed a definitive agreement over the weekend that PW signed a highly-conditional LOI. That would be moving incredibly fast, but I think WB would have gotten it done. Though BBRY is not the type of asset for which WB is looking (I'm confident it would be in his "too hard" pile).

[cogitator99]

" I think the breakup value is conservatively $5 per share (others on the BBRY thread would disagree), so I don't think there is much more to lose here and I think PW's reputation and Fairfax's fair and friendly acquisitions brand is worth more than the possible savings that would be achieved from a lower purchase price. Many arbs will be unwilling or unable to take a position without a definitive agreement, so the "spread" (hard to call this a true spread without that definitive agreement) is likely to stay pretty wide unless there is a leak about a higher bid.

 

As an aside, this does not seem to me like a Warren Buffet-like move. I believe that if WB wanted this asset, he would have signed a definitive agreement over the weekend that PW signed a highly-conditional LOI. That would be moving incredibly fast, but I think WB would have gotten it done. Though BBRY is not the type of asset for which WB is looking (I'm confident it would be in his "too hard" pile)."

 

***

 

How do you get to your $5/sh? I note that's not small downside from here. And though it certainly doesn't seem likely we'll get there, BBRY has surprised a lot of otherwise sharp value guys on the downside. In reality we are relying on PW being true to his word and providing a floor here.

 

If this would be in WB's "too hard" pile then perhaps it should be on PW's also...not like PW is a 25-30 year-old technologist...at the very least I hope there is someone in his team with the skill set. Not knocking FFH at all -- I have tremendous respect for their track record -- but this is one of the toughest businesses out there. 

 

I liked your post -- you've thought it through. Thanks. 

 

[dartmonkey]

At the end of the day, the newco buyer will have $750 in rollover equity from Fairfax and Lazaridis (or other consortium members), $1 billion in new cash equity from another source and $3 billion in bank debt. It will use that money to pay all of BBRY's current shareholders (other than the consortium shareholders) $9 per share in cash.

 

Thanks, that's pretty much what I understood. So FFH and Lazaridis keep their 10% and 6% stakes respectively, and the other 84% get taken out with $1B in new cash equity (21%) plus $3B in bank debt (63%). So Fairfax then would own 10%/(10%+6%+21%) = 27% of the new equity (27%), Lazaridis would own 6%/ (10%+6%+21%) =16%, the new equity holders would own the other 58%. Meaning Fairfax would have levered up its 10% to 27% using bank debt, is that right?

 

If I were the bank, I think I'd want a pretty high interest rate to be part of that $3B, unless Watsa could convince me that there it was guaranteed by assets that were sure to be there is worst comes to worst.

[dartmonkey]

 

 

So FFH and Lazaridis keep their 10% and 6% stakes respectively, and the other 84% get taken out with $1B in new cash equity (21%) plus $3B in bank debt (63%).

 

 

So much for that combination - WSJ is reporting that "Mssrs. Lazaridis and Fregin are not working with Fairfax Financial, according to a person close to the matter. The two men have hired Goldman Sachs & Co. and Centerview Partners LLC as consultants on their review process, according to Thursday’s filing."

 

As a Fairfax shareholder, this is one bid for which I definitely wish the competition the best of luck! I will be very happy to take a higher price, plus the breakup fee, and let Mr Lazaridis decide what to do with RIM.

 

 

[tengen]

As a Fairfax shareholder, this is one bid for which I definitely wish the competition the best of luck! I will be very happy to take a higher price, plus the breakup fee, and let Mr Lazaridis decide what to do with RIM.

 

I'm more of the view that having Lazaridis return to lead the company is akin to having Wozniak returning to lead Apple instead of Jobs. Furthermore, there does not appear to be a BBRY version of Jobs. Maybe it was the co-op student who started Kik.

[Lazarus Long]

Ha. I was wrong on that combination. That didn't take long. I thought the play was for PW and ML to work together. This seems to make it harder for FFX to get financing for its $9 bid. Should be better for FFX shareholders if another bidder "wins" this auction (firesale?). Not sure this is good for the arb play though, unless Lazaridis/Fregin can actually get financing for a topping bid.

 

Dart, I agree with your math and that this loan would be risky. The buyout group could pledge BBRY's real estate and patents to secure the loan. Hey, the Rue 21 buyout closed today, so perhaps there is a market for BBRY credit.