The odd thing about the news that Toronto insurance company Fairfax Holdings won't buy BlackBerry in a $4.7 billion takeover isn't that Fairfax came to its senses about buying a company losing both money and market share.
The perplexing part is the investment deal the two companies are doing instead.
Fairfax, already BlackBerry's largest shareholder, is investing another $1 billion in exchange for debt that can be converted into another 16% ownership interest in BlackBerry -- at a price of $10 a share, Since BlackBerry closed Friday at $7.77, and fell to $6.50 in early trading Monday, that's a bet that's likely to be out of the money for a while, maybe forever.
The bet gets even odder in light of third-quarter market share statistics released by Strategy Analytics last month. In the third quarter, BlackBerry's share of the global smartphone market plummeted to 1% from 4.3% in the same quarter a year earlier, as units shopped dropped to 2.5 million from 7.4 million. All of its share loss appeared to go directly to the Android platform that has become the top rival to Apple's iPhone, the Newton, Mass. based market researcher said.
Granted, BlackBerry does generate positive operating cash flow. But the deal is an odd one by nearly any standard of evaluating leveraged transactions.
The idea of taking a company like BlackBerry into private ownership is that it buys time for a talented management team to work on products and strategies that will turn the company around eventually, and which will work better if the company can execute without day-to-day criticism from stock analysts and public investors. And the deal's sponsors try to make their money by buying the company cheaply, with borrowed money.
In this deal, Fairfax is paying an above market price. It is replacing the CEO, undermining the idea that BlackBerry's management team can reverse its problems. Its latest product line is significantly less than a hit. And BlackBerry will remain a public company, its every re-investment subject to instant second-guessing. So what's wrong with this picture?
Better question may be, what's right with this picture. Fairfax boss Prem Watsa, who will become BlackBerry's lead director, is a billionaire, and Fairfax stock has risen 100-fold under his leadership. This deal will test his savvy.
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