BlackBerry descent begets cheapest technology takeover
New York • BlackBerry Ltd., once valued at $83 billion, may be stuck with the cheapest valuation ever for a North American technology or telecommunications takeover.
The smartphone maker said yesterday it reached a tentative agreement for a $4.7 billion buyout by a group led by Fairfax Financial Holdings Ltd., its biggest shareholder. Including net cash, the proposal values the Waterloo, Ontario-based company at an 80 percent discount to its book value and just 0.17 times its sales, the cheapest revenue multiple on record among similar- sized North American telecommunications or technology acquisitions, according to data compiled by Bloomberg.
While the company has six weeks to seek other bids, Pacific Crest Securities said investors should be happy to get the $9 a share that Fairfax is offering. Chief Executive Officer Thorsten Heins, who took over in January 2012, didn't publicly disclose the company was for sale until last month after almost a year of canvassing potential buyers. Now, BlackBerry has posted a string of quarterly sales declines and lost almost $79 billion in market value as it fell behind Apple and Google. Last week, BlackBerry said it will cut a third of its workforce and take a writedown of as much as $960 million.
"It is being valued like a broken company," Anil Doradla, a Chicago-based analyst at William Blair & Co., said in a phone interview. "They had a chance to potentially execute on an M&A deal when these guys were doing better. So by the time Thorsten Heins came on board, I think it was too little, too late."
Including the $2.8 billion of cash and equivalents BlackBerry had in the most recent quarter, the proposal values the company at about $1.9 billion. The group led by Toronto- based Fairfax is still seeking financing for the offer, which is subject to due diligence and further negotiation.
Fairfax owns about 10 percent of BlackBerry's common stock. BlackBerry didn't name the other members of the takeover consortium. Fairfax CEO Prem Watsa said in an interview that the consortium at this point doesn't include Mike Lazaridis, inventor of the BlackBerry and former co-CEO of the company, who has a 5.7 percent stake in the company.
Lisette Kwong, a spokeswoman for BlackBerry, declined to comment on the Fairfax bid and reiterated that the deal includes a go-shop period that may reveal other offers.
"Our offer represents compelling value, particularly by comparison to recent transactions like Microsoft and Nokia," Paul Rivett, president of Fairfax, said in an e-mailed response to questions.
Microsoft, the world's largest software company, agreed this month to buy Nokia's handset business for $7.2 billion. Microsoft paid 0.42 times Nokia's trailing 12-month revenue from devices and services, according to data compiled by Bloomberg that include net debt.
When BlackBerry shares were halted yesterday before news of the deal, the stock's 20-day average price was $10.31, higher than Fairfax's $9-a-share cash bid. The offer is a 3.2 percent premium to the closing price on Sept. 20, when the stock plunged after BlackBerry said it's cutting 4,500 jobs and will record an inventory writedown, mostly for the new Z10 touch-screen devices.
The transaction would value BlackBerry at an 83 percent discount to the $11.3 billion of revenue it generated in the past 12 months, according to data compiled by Bloomberg. That's a lower sales multiple than any other technology or telecommunications takeover struck in North America for more than $1 billion, the data show.
Those deals had a median book value multiple of 5.3, while the BlackBerry buyout would be for just 0.2, the data show.
For shareholders, a deal still may be wishful thinking because there isn't yet a firm offer on the table, MKM Partners's Michael Genovese said. There's a chance that Fairfax will reduce its offer after scrutinizing BlackBerry's books, and other bidders are unlikely to step in, the Stamford, Connecticut-based analyst said.
He values BlackBerry at $7 a share, excluding its cash, which the company is projected to burn through in the coming quarters.
"If you own the stock, your upside is capped at $9," Genovese said in a phone interview. "This is not yet a real deal. Hopefully, for people who are long BlackBerry, it will result in one, but that's very far from certain."
BlackBerry's dimming prospects led the company to form a special board committee last month to evaluate all possible options, including joint ventures, partnerships or an outright sale.
That announcement followed almost a year of bankers from JPMorgan Chase and RBC Capital Markets quietly contacting possible bidders, said two people with knowledge of the matter, who asked not to be named because the talks were private. The advisers found little interest in buying the whole company, the people said at the time.
It's unlikely that other suitors will emerge with higher offers for BlackBerry, according to Doradla of William Blair.
"I would be surprised if someone would come in and outbid Fairfax," the analyst said. "If someone were to buy them out, by now they would have made that decision. I don't know why they'd go after the asset today rather than one year or six months ago. Nothing has really changed."
That means $9 a share may be the best BlackBerry shareholders are going to get, said James Faucette, a Portland, Ore.-based analyst at Pacific Crest.
"I actually think this is a pretty attractive offer for shareholders," he said in a phone interview. "Honestly, if they were to let it go a few quarters, it would be meaningfully worse."
While there's value in BlackBerry's intellectual property and enterprise platform, it's difficult to envision a competitor or another technology company stepping in with a rival bid for the whole company, Oppenheimer Holdings Inc.'s Ittai Kidron wrote in a report yesterday after the Fairfax offer was announced.
"That said, it is possible a company could come out of the woodwork or potentially another financial entity/consortium would find value in pursuing a deal," the New York-based analyst wrote.
The Wall Street Journal reported that there are other parties still considering making a bid for BlackBerry, citing an unnamed person familiar with the matter. It was unclear how the Fairfax news would impact the deliberations, the newspaper said.
BlackBerry's sum-of-the-parts valuation could be higher than $9 a share and it's possible it could fetch more from a consortium that included strategic buyers interested in carving up its assets, said Sachin Shah, a special situations and merger arbitrage strategist at New York-based Albert Fried & Co.
In that scenario, there would need to be some sort of Canadian participation to convince regulators to approve a deal, as well as a group of buyers that can agree on how to divide the divisions, Shah said.
"It's not clear to me that they can come together," Shah said. "That's the headwind."
In the meantime, after BlackBerry's stock ended yesterday 18 cents below Fairfax's proposed price, it's a sign that, for now, traders aren't betting on any better bids, he said.
"The market is not expecting it to be higher," Shah said. "It could be lower."
With assistance from Hugo Miller and Katia Dmitrieva in Toronto.