9/24/13
On Monday Blackberry’s biggest shareholder, Fairfax Financial , announced a bid of $9 a share to take the company private. This is not the end of the Blackberry saga, it’s likely just the beginning.
Of course, the investor behind Fairfax is Prem Watsa. Watsa’s Fairfax owns around 10% of BBRY at much higher prices, roughly $17 per share.
With an official bid now on the table, and a November 4 deadline, Watsa’s bid creates a virtually risk-free trade for other influential investors to enter the trade. By stepping in today, an activist investor or group would have a floor in Watsa’s bid, and the power to influence shareholders to fight for a higher price for their shares.
Moreover, we have 42 days to see if another buyer, with a better bid, will come to the table. In Blackberry, we have the real opportunity for a bidding war. An activist investor that enters Blackberry may find himself owning shares in a company with an implicit floor, while composing a bidding war.
Are there challenges associated with Canada’s takeover laws. Yes. Will that mean one of the world’s best technology providers in the cell phone/mobile computing space quietly goes away for half of its book value? Unlikely.
Back in 2011, there was a company by the name of America Online. AOL AOL -0.51% too was considered a rapidly dying business. It was hated by and poorly understood by analysts. But it had a fantastic balance sheet, and valuable patents and technologies. Starboard Value stepped in and acquired a huge position in AOL. They forced the company to sell its valuable patents and technology. In doing this they created instant value for the shareholders. AOL’s stock price went from a low of $10 in August of 2011 to over $40 in April of 2013.
Blackberry is a stock with about $5 in cash per share with zero debt. The company, according to a consensus of analysts has anywhere from $8 to $10 worth of patents and technology. Regardless of the synergistic value creation that those patents and technology could mean for another big mobile player (Apple AAPL -1.46%, Samsung, Microsoft MSFT -1.02% …) Blackberry is still selling for a substantial discount to its break-up value.
We may see three potential outcomes for Blackberry, with the involvement of an activist investor entering this situation:
Scenario 1 – Mr. Watsa has supplied a floor from which an activist investor can negotiate from on behalf of shareholders. The result: Virtually no risk and a potential premium to Watsa’s bid won for shareholders.
Scenario 2 – With an approaching November deadline and a bid on the table from Watsa, a rapidly evolving bidding war could ensue for the coveted Blackberry technology.
Scenario 3 – An activist investor could block Watsa, force the sale of Blackberry’s most valuable assets, and then force management to pay out a one-time special dividend to its shareholders.
Bottom line: With a takeover bid in place, Blackberry offers a very attractive asymmetric risk/return profile. The stock is just in need of at least one influential investor to fight for the highest value for shareholders in a Blackberry sale.
Consider this: Comparing a Blackberry outcome to the AOL outcome (where Starboard Value forced the company to sell patents and change its strategy), Blackberry could be worth anywhere from $21 to $25 a share.
Another interesting comparable: Dell.
According to Bloomberg, when Dell was taken private by Michael Dell and Silver Lake Partners, at under 6 times its EBITDA for the prior 12 months. The valuation ranked as the lowest multiple ever paid in a buyout of a technology company for more than $1 billion.
At $9 per share, BBRY would be valued at just 1.3 times EBITDA – a quarter of the cheapest takeover in the history of billion dollar+ tech takeovers.