BlackBerry says Fairfax to buy $250 million more debentures

[ourkid8]

http://finance.yahoo.com/news/blackberry-says-fairfax-buy-250-184609577.html

 

I guess this means Fairfax now purchased $500 million of the convertable debt.  This position keeps on getting larger and larger and it's honestly scaring the $hit out of me!!!

 

Tks,

S

[A_Hamilton]

Why? They went from being a 10% equity holder to being a holder of $500 million in what are effectively first lien notes and 10% equity holders. This thing goes belly up the whole EV only needs to be $1.25 billion for them to be whole on the notes.

[Grenville]

I've decided to sell down my stake in Fairfax and I wanted to share with the board members. I've owned Fairfax since 2008 and attended the AGM since 2010. I've also read all the AR's since inception and have a lot of respect for what Prem has built both in terms of companies and people.

 

My issue has been with position sizing with respect to shareholder's equity. I've asked questions related to this at the 2010 AGM and this  year at the dinner. Below are my questions and the responses I got from Prem. I went back to my notes to post here.

 

2010 AGM:

"How does FFH decide its max position size for an investment in the common stock portfolio? Is there a general rule based on % of equity? For example when WFC continued to decrease in value to $10, no additional shares were bought.

-->Answer from Prem (from my notes): 5 to 10% range at the high end in relation to book value.

 

2013 Dinner:

"At a past AGM you mentioned the max position size for an investment was 5 to 10% at the high end. The position in Blackberry at cost using YE SE was 11.5%. What changed to allow such a large common stock position relative to past guidance?"

--> Answer from Prem - Referred to Paul Rivett to confirm position size and then answered that they were just averaging down into the investment.

 

Recent comments re Blackberry $9 offer

"

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 $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.”

http://www.theglobeandmail.com/report-on-business/top-business-stories/fairfaxs-prem-watsa-fires-back-at-skeptics-as-doubts-over-blackberry-deal-mount/article14540650/

---

 

The fact that Prem & Fairfax are investing an additional $250mln after already investing 880mln after all their comments at the meetings and in the press related to this deal were too much for me. I understand that 1.13bln is not much in relation to assets, but it's huge related to shareholder's equity. The position size was huge related to equity before this additional investment and now it's bigger. Some may say that this additional investment is in the form of debt so it's safer, but to me it's an additional investment.

 

I would much prefer Prem & Fairfax putting this kind of money into better businesses, but I understand it's not their specialty. I just think if you're going to go after turn arounds you need to be disciplined on how much money you put in, especially when that's what your telling your partners.

 

I just don't get it. They have now invested 1.38bln! Think about the opportunity cost of that money in todays market.

[ourkid8]

Thank you for posting this as it fully answers A_Hamilton on why i am getting annoyed and scared of this investment.  Imagine the universe of high quality businesses we could have taken private in the $1.3bB range. 

 

Tks,

S

I've decided to sell down my stake in Fairfax and I wanted to share with the board members. I've owned Fairfax since 2008 and attended the AGM since 2010. I've also read all the AR's since inception and have a lot of respect for what Prem has built both in terms of companies and people.

 

My issue has been with position sizing with respect to shareholder's equity. I've asked questions related to this at the 2010 AGM and this  year at the dinner. Below are my questions and the responses I got from Prem. I went back to my notes to post here.

 

2010 AGM:

"How does FFH decide its max position size for an investment in the common stock portfolio? Is there a general rule based on % of equity? For example when WFC continued to decrease in value to $10, no additional shares were bought.

-->Answer from Prem (from my notes): 5 to 10% range at the high end in relation to book value.

 

2013 Dinner:

"At a past AGM you mentioned the max position size for an investment was 5 to 10% at the high end. The position in Blackberry at cost using YE SE was 11.5%. What changed to allow such a large common stock position relative to past guidance?"

--> Answer from Prem - Referred to Paul Rivett to confirm position size and then answered that they were just averaging down into the investment.

 

Recent comments re Blackberry $9 offer

"

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 $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.”

http://www.theglobeandmail.com/report-on-business/top-business-stories/fairfaxs-prem-watsa-fires-back-at-skeptics-as-doubts-over-blackberry-deal-mount/article14540650/

---

 

The fact that Prem & Fairfax are investing an additional $250mln after already investing 880mln after all their comments at the meetings and in the press related to this deal were too much for me. I understand that 1.13bln is not much in relation to assets, but it's huge related to shareholder's equity. The position size was huge related to equity before this additional investment and now it's bigger. Some may say that this additional investment is in the form of debt so it's safer, but to me it's an additional investment.

 

I would much prefer Prem & Fairfax putting this kind of money into better businesses, but I understand it's not their specialty. I just think if you're going to go after turn arounds you need to be disciplined on how much money you put in, especially when that's what your telling your partners.

 

I just don't get it. They have now invested 1.38bln! Think about the opportunity cost of that money in todays market.

[A_Hamilton]

Thank you for posting this as it fully answers A_Hamilton on why i am getting annoyed and scared of this investment.  Imagine the universe of high quality businesses we could have taken private in the $1.3bB range. 

 

Tks,

S

I've decided to sell down my stake in Fairfax and I wanted to share with the board members. I've owned Fairfax since 2008 and attended the AGM since 2010. I've also read all the AR's since inception and have a lot of respect for what Prem has built both in terms of companies and people.

 

My issue has been with position sizing with respect to shareholder's equity. I've asked questions related to this at the 2010 AGM and this  year at the dinner. Below are my questions and the responses I got from Prem. I went back to my notes to post here.

 

2010 AGM:

"How does FFH decide its max position size for an investment in the common stock portfolio? Is there a general rule based on % of equity? For example when WFC continued to decrease in value to $10, no additional shares were bought.

-->Answer from Prem (from my notes): 5 to 10% range at the high end in relation to book value.

 

2013 Dinner:

"At a past AGM you mentioned the max position size for an investment was 5 to 10% at the high end. The position in Blackberry at cost using YE SE was 11.5%. What changed to allow such a large common stock position relative to past guidance?"

--> Answer from Prem - Referred to Paul Rivett to confirm position size and then answered that they were just averaging down into the investment.

 

Recent comments re Blackberry $9 offer

"

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 $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.”

http://www.theglobeandmail.com/report-on-business/top-business-stories/fairfaxs-prem-watsa-fires-back-at-skeptics-as-doubts-over-blackberry-deal-mount/article14540650/

---

 

The fact that Prem & Fairfax are investing an additional $250mln after already investing 880mln after all their comments at the meetings and in the press related to this deal were too much for me. I understand that 1.13bln is not much in relation to assets, but it's huge related to shareholder's equity. The position size was huge related to equity before this additional investment and now it's bigger. Some may say that this additional investment is in the form of debt so it's safer, but to me it's an additional investment.

 

I would much prefer Prem & Fairfax putting this kind of money into better businesses, but I understand it's not their specialty. I just think if you're going to go after turn arounds you need to be disciplined on how much money you put in, especially when that's what your telling your partners.

 

I just don't get it. They have now invested 1.38bln! Think about the opportunity cost of that money in todays market.

 

Opportunity cost? Where else are they getting seven year notes at 6% that are effectively first lien notes with an equity kicker? As a total aside, maybe not relevant to this discussion maybe it is, FFH now has over $1 billion invested in Bank of Ireland.

[Grenville]

What's their cost base in BOI?

[A_Hamilton]

What's their cost base in BOI?

 

$350 million.

 

I agree there is an outstanding risk control question of how big of a position they will take in a given company as a % of FFH's equity and it isn't reassuring that Prem gives a poor seat of the pants answer. With that said, however, there is a large difference between another $500 million in BBRY equity and another $500 million in BBRY debt.

[Grenville]

What's their cost base in BOI?

 

$350 million.

 

I agree there is an outstanding risk control question of how big of a position they will take in a given company as a % of FFH's equity and it isn't reassuring that Prem gives a poor seat of the pants answer. With that said, however, there is a large difference between another $500 million in BBRY equity and another $500 million in BBRY debt.

 

Thanks for the cost base in BOI.

 

I agree there is a huge difference between debt and equity. Risk is much less. It's the position size that bothers me.

[A_Hamilton]

What's their cost base in BOI?

 

$350 million.

 

I agree there is an outstanding risk control question of how big of a position they will take in a given company as a % of FFH's equity and it isn't reassuring that Prem gives a poor seat of the pants answer. With that said, however, there is a large difference between another $500 million in BBRY equity and another $500 million in BBRY debt.

 

Thanks for the cost base in BOI.

 

I agree there is a huge difference between debt and equity. Risk is much less. It's the position size that bothers me.

 

I would say my biggest issue with BBRY is that they took a huge equity position (when they had the Total Return Swaps on BBRY as well) relative to FFH's equity. That made absolutely no sense.

[Guest wellmont]

http://finance.yahoo.com/news/blackberry-says-fairfax-buy-250-184609577.html

 

I guess this means Fairfax now purchased $500 million of the convertable debt.  This position keeps on getting larger and larger and it's honestly scaring the $hit out of me!!!

 

Tks,

S

 

as long as he keeps buying debt he's okay. and he's supporting his equity position by giving them money. simply notice he won't touch the equity any more. which is why his deal to buy the company fell through. his "partners" noticed he was not going to be putting any more money up. the latest $250m tells me that cash burn is higher than expected.

[Uccmal]

What's their cost base in BOI?

 

$350 million.

 

I agree there is an outstanding risk control question of how big of a position they will take in a given company as a % of FFH's equity and it isn't reassuring that Prem gives a poor seat of the pants answer. With that said, however, there is a large difference between another $500 million in BBRY equity and another $500 million in BBRY debt.

 

Thanks for the cost base in BOI.

 

I agree there is a huge difference between debt and equity. Risk is much less. It's the position size that bothers me.

 

 

 

I would say my biggest issue with BBRY is that they took a huge equity position (when they had the Total Return Swaps on BBRY as well) relative to FFH's equity. That made absolutely no sense.

 

What if the value of BBRYs carcass is zero.  Then FFh has invested 1.3 b in an investment worth nothing.  They are out of their circle of competence, and it's totally speculative.  BOI I always understood because its a bank with real customers, a real franchise, etc.  RIM no longer has a franchise.  They may have patents worth a couple hundred million, but time has moved on, since the heady days of patent buying, and technology has moved on as well. 

 

1.4 billion invested in a good cash flow business would be throwing off 150 million a year right now. 

 

I asked myself some really hard questions about FFh and have reached the conclusion, a year ago, that I am better off not owning it at this time. 

[StubbleJumper]

Thank you for posting this as it fully answers A_Hamilton on why i am getting annoyed and scared of this investment.  Imagine the universe of high quality businesses we could have taken private in the $1.3bB range. 

 

Tks,

S

I've decided to sell down my stake in Fairfax and I wanted to share with the board members. I've owned Fairfax since 2008 and attended the AGM since 2010. I've also read all the AR's since inception and have a lot of respect for what Prem has built both in terms of companies and people.

 

My issue has been with position sizing with respect to shareholder's equity. I've asked questions related to this at the 2010 AGM and this  year at the dinner. Below are my questions and the responses I got from Prem. I went back to my notes to post here.

 

2010 AGM:

"How does FFH decide its max position size for an investment in the common stock portfolio? Is there a general rule based on % of equity? For example when WFC continued to decrease in value to $10, no additional shares were bought.

-->Answer from Prem (from my notes): 5 to 10% range at the high end in relation to book value.

 

2013 Dinner:

"At a past AGM you mentioned the max position size for an investment was 5 to 10% at the high end. The position in Blackberry at cost using YE SE was 11.5%. What changed to allow such a large common stock position relative to past guidance?"

--> Answer from Prem - Referred to Paul Rivett to confirm position size and then answered that they were just averaging down into the investment.

 

Recent comments re Blackberry $9 offer

"

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 $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.”

http://www.theglobeandmail.com/report-on-business/top-business-stories/fairfaxs-prem-watsa-fires-back-at-skeptics-as-doubts-over-blackberry-deal-mount/article14540650/

---

 

The fact that Prem & Fairfax are investing an additional $250mln after already investing 880mln after all their comments at the meetings and in the press related to this deal were too much for me. I understand that 1.13bln is not much in relation to assets, but it's huge related to shareholder's equity. The position size was huge related to equity before this additional investment and now it's bigger. Some may say that this additional investment is in the form of debt so it's safer, but to me it's an additional investment.

 

I would much prefer Prem & Fairfax putting this kind of money into better businesses, but I understand it's not their specialty. I just think if you're going to go after turn arounds you need to be disciplined on how much money you put in, especially when that's what your telling your partners.

 

I just don't get it. They have now invested 1.38bln! Think about the opportunity cost of that money in todays market.

 

Opportunity cost? Where else are they getting seven year notes at 6% that are effectively first lien notes with an equity kicker? As a total aside, maybe not relevant to this discussion maybe it is, FFH now has over $1 billion invested in Bank of Ireland.

 

6%????  Who cares about the 6%?  When it comes to Blackberry, I want return OF capital, not return ON capital.  The potential for a permanent loss of capital is significant, and FFH just keeps expanding its (my) exposure.  :'(

 

 

SJ

[ourkid8]

I believe I am at that point as well and it will kill me to sell as i wanted to hold on to this investment for life. In regards to blackberry, it seems Prem's emotions of saving a past Canadian icon seem to have taken the better of him.

 

Prem learned earlier in his career it is better to buy a high quality insurance companies yet he still has not learned it is also better to buy high quality non insurance businesses as well.  Tech companies can become irrelevant very quickly and that's the direction blackberry seems to be heading. I agree, this $1.3B investment is fully speculative if they can turn this company around and not a value play.

 

Tks,

S

 

What's their cost base in BOI?

 

$350 million.

 

I agree there is an outstanding risk control question of how big of a position they will take in a given company as a % of FFH's equity and it isn't reassuring that Prem gives a poor seat of the pants answer. With that said, however, there is a large difference between another $500 million in BBRY equity and another $500 million in BBRY debt.

 

Thanks for the cost base in BOI.

 

I agree there is a huge difference between debt and equity. Risk is much less. It's the position size that bothers me.

 

 

 

I would say my biggest issue with BBRY is that they took a huge equity position (when they had the Total Return Swaps on BBRY as well) relative to FFH's equity. That made absolutely no sense.

 

What if the value of BBRYs carcass is zero.  Then FFh has invested 1.3 b in an investment worth nothing.  They are out of their circle of competence, and it's totally speculative.  BOI I always understood because its a bank with real customers, a real franchise, etc.  RIM no longer has a franchise.  They may have patents worth a couple hundred million, but time has moved on, since the heady days of patent buying, and technology has moved on as well. 

 

1.4 billion invested in a good cash flow business would be throwing off 150 million a year right now. 

 

I asked myself some really hard questions about FFh and have reached the conclusion, a year ago, that I am better off not owning it at this time.

[alertmeipp]

damn, i wish bb at least float some of those convert to the public. i woild like some of those. i may get some ffh coz of that actually

[Phoenix01]

Today BB has 3B in cash & 1B in convertible debt.  For simplicity sake let's assume the rest nets out to 0, for a tangible value of $2B.

 

The company is still generating 1B of free cashflow annually despite all of the crap it has been through.  If you believe in Chen & his team, then this is a bargain.

 

I am with Prem on this one.  He has often said that you can't over pay for a an excellent leader.  I'm hoping to meet with Chen during the Shareholder meeting to confirm my suspicions that he is the right person to turn BB around.

[mcliu]

Today BB has 3B in cash & 1B in convertible debt.  For simplicity sake let's assume the rest nets out to 0, for a tangible value of $2B.

 

The company is still generating 1B of free cashflow annually despite all of the crap it has been through.  If you believe in Chen & his team, then this is a bargain.

 

I am with Prem on this one.  He has often said that you can't over pay for a an excellent leader.  I'm hoping to meet with Chen during the Shareholder meeting to confirm my suspicions that he is the right person to turn BB around.

 

There's always the issue of good management meeting poor economics. Although I think at these prices, if the company can get its costs under control, things will work out okay.

[Guest wellmont]

Today BB has 3B in cash & 1B in convertible debt.  For simplicity sake let's assume the rest nets out to 0, for a tangible value of $2B.

 

The company is still generating 1B of free cashflow annually despite all of the crap it has been through.  If you believe in Chen & his team, then this is a bargain.

 

I am with Prem on this one.  He has often said that you can't over pay for a an excellent leader.  I'm hoping to meet with Chen during the Shareholder meeting to confirm my suspicions that he is the right person to turn BB around.

 

wrong. the company is incinerating cash. it burned almost half a billion in the last 39 weeks and cash burn accelerated in the most recent quarter. your fcf number is astonishingly wrong. Chen's stated objective is to "arrest" cash burn.

[prevalou]

cash burn is due to intangibles purchases. Are these maintenance cap ex, recurring cap ex, investments or mistakes made by previous management ?

[AZ_Value]

Today BB has 3B in cash & 1B in convertible debt.  For simplicity sake let's assume the rest nets out to 0, for a tangible value of $2B.

 

The company is still generating 1B of free cashflow annually despite all of the crap it has been through.  If you believe in Chen & his team, then this is a bargain.

 

I am with Prem on this one.  He has often said that you can't over pay for a an excellent leader.  I'm hoping to meet with Chen during the Shareholder meeting to confirm my suspicions that he is the right person to turn BB around.

 

wrong. the company is incinerating cash. it burned almost half a billion in the last 39 weeks and cash burn accelerated in the most recent quarter. your fcf number is astonishingly wrong. Chen's stated objective is to "arrest" cash burn.

 

Thank you Wellmont.

 

I was seating here since yesterday waiting for someone to point out that barely two months after the $1B cash infusion (after the failed go private attempt) Blackberry is going back to Fairfax for $250M more in cash. And no one is asking why, or even considering it to be worrisome.

Remember the days when part of the RIM bull case was how they had all this cash on their balance sheet with no debt etc... but now two months can't go by without the need for an additional cash infusion. Come on guys... COME ON!!

[prevalou]

"During the nine months ended November 30, 2013, the additions to intangible assets primarily consisted of payments

relating to amended or renewed licensing agreements, as well as agreements with third parties for the use of intellectual

property, software, messaging services and other BlackBerry related features." source quarterly report

What can we infer from this ?

 

[Christopher1]

They forecast a substantial decline of quarterly cash expenditures for intangible asset purchases from fiscal Q3 2015.

 

From last CC:

"Intangible asset purchases were $234 million in the quarter, which consist primarily of payments relating to amended or renewed license agreements. These licensing agreements, of which the majority of the remaining value of approximately $500 million is reflected in our purchase commitments, will be completed by Q3 of fiscal 2015.

As a result, we expect the quarterly cash expenditures to decline substantially at that time. While we may enter into new licensing agreements, the lower handset volumes will likely significantly reduce the cash outlay, resulting in additional liquidity."

[giofranchi]

I understand when all of you talk about equity hedges… They are controversial and rightly so!

But I don’t understand all the fuss about BBRY… The equity portfolio of FFH has always performed very well! Recently, it has not performed as well as the Russell2000… but you don’t really want to see a portfolio of value investments outperform the Russell2000, when that index gains nearly 40% in a year… Do you? The fact their equity portfolio has performed well, despite the investment in BBRY, tells me they have been disciplined enough in position sizing.

I see the BBRY investment exactly like wellmont says: as long as FFH doesn’t invest more in equity, I am fine with it.

 

Gio

 

[Valuebo]

but you don’t really want to see a portfolio of value investments outperform the Russell2000, when that index gains nearly 40% in a year… Do you?

 

Why? Is it bad voodoo?

[Uccmal]

Today BB has 3B in cash & 1B in convertible debt.  For simplicity sake let's assume the rest nets out to 0, for a tangible value of $2B.

 

The company is still generating 1B of free cashflow annually despite all of the crap it has been through.  If you believe in Chen & his team, then this is a bargain.

 

I am with Prem on this one.  He has often said that you can't over pay for a an excellent leader.  I'm hoping to meet with Chen during the Shareholder meeting to confirm my suspicions that he is the right person to turn BB around.

 

Fairfax is scrambling to save their investment.  This is costing more than anticipated by a long shot.  Rather than getting out they are repeating a common mistake they do.  They did it with Cunningham Lindsay, SFK via rights issues.  They don't know when to get out and move on. 

 

Here is the thing: You don't see a lot of others lining up to invest in BBRY right now.  Compare this to Seaspan where they decided to go forward with a stock issue Because of market demand. 

 

When asked about his investments Watsa has said "we like the guys in charge" many times. 

 

Sfk - Management got replaced and the company sold

Tom ward - well we know how that ended

Mike L. And then Thornstein

There are others. 

 

To be fair to Prem, I have noticed his inconsistencies more than anyone else, because I have followed FFh so closely for so long.  I am sure other CEOs in the public eye have their inconsistencies, as I myself do.

 

I am struggling to figure out what business BBRY is in and then if it is going to be profitable, and at what level.  Will it be profitable enough to sustain a $10 share price.  I am pretty convinced that FFh hasn't a clue how this will turn out.  This is not a case like Buffett investing in GE, or Goldman, or BAC where there are real live sustainable businesses in behind the morass.  With BBRY there is nothing sustainable backing it.

 

 

[giofranchi]

but you don’t really want to see a portfolio of value investments outperform the Russell2000, when that index gains nearly 40% in a year… Do you?

 

Why? Is it bad voodoo?

 

;D ;D ;D

No, of course not! it is just that usually value investments do not outperform in a frothy market...

 

Gio