Looking at the BlackBerry announcement, I couldn’t help but think of that René Magritte painting of a pipe with a statement in French that this is not a pipe. For BlackBerry, this is not a deal, or at least not yet.
What was announced on Monday was instead a “letter of intent†between Blackberry and Fairfax Financial Holdings, a financial company that owns about 10 percent of BlackBerry’s common shares. Under the letter of intent, Fairfax is offering to pay $9 per share.
But a letter of intent is not a binding deal, and a lot of things need to happen before the company is actually acquired for $9 a share.
We don’t yet have the full text of the letter of intent, but in a best-case scenario, the letter obligates Fairfax to make efforts to secure financing and acquire BlackBerry. But Fairfax’s obligations to actually go through with a deal will be subject to a number of conditions, including that Fairfax is satisfied with its due diligence or investigation of BlackBerry’s finances and that it negotiate a definitive agreement. Most important, any deal will need financing before Fairfax will be required to acquire BlackBerry.
It is quite unusual to announce any acquisition like this, let alone without financing. Most targets would require a commitment letter from banks that make financing more certain. Absent that, the target’s board would ask for at least a letter from the banks that states that the buyers were “highly confident†that financing would be obtained. These letters, invented by Michael Milken back in the 1980s for Drexel Burnham Lambert are the realm of bidders who are unsure about financing. But at least the banks give some level of commitment in a highly confident level even if they can later back out.
In this case, the best Fairfax could do was say that it was “seeking†financing from Bank of America Merrill Lynch and BMO Capital Markets. So am I.
Additionally, given Fairfax’s 10 percent stake in BlackBerry and the company’s perilous state, any lender would probably require much more equity before financing this transaction. So Fairfax is going to have to find a partner.
In this light, the best that can be made of this letter of intent is that it is a Hail Mary pass, aimed in part at putting a temporary floor on BlackBerry’s share price and perhaps kick starting some type of auction. If BlackBerry were more sure of itself, it would have certainly waited until financing could have been lined up.
As evidence of this, the letter of intent contains an unusual feature. BlackBerry has agreed to pay a fee to Fairfax of 30 cents a share if it enters into a transaction with another party. By my calculations, this is roughly $150 million. Fairfax and BlackBerry said they would seek to sign an agreement by Nov. 4. So $150 million is not a bad payday for running around for a month or two and trying to persuade a bank to rescue BlackBerry.
And there is also a go-shop in the letter. BlackBerry will be allowed to solicit other offers, though, presumably, it has already been doing this. It will gain some advantage, perhaps, by now being able to promote a price as it tries to entice someone.
But that is all BlackBerry has right now: a hope that financing will come through and that Fairfax will remain committed to this process. Alternatively, perhaps another bidder will come in. As Barbara Stymiest, the chairwoman of BlackBerry’s board of directors, stated. “The Special Committee is seeking the best available outcome for the Company’s constituents, including for shareholders.â€
But Blackberry is taking a terrible risk here since the Fairfax deal has a real risk of collapsing and leaving BlackBerry’s committee and its shareholders with nothing. The board probably felt it had no choice.
In other words, this is a “deal†that still has more time to bake before it becomes a deal.
