BlackBerry’s announcement that the company was ending its sale process and receiving a $1 billion investment is all about the company’s endgame.
The obvious conclusion from the announcement was that Fairfax Financial Holdings was unable to pull off its attempt to bring together financing and other investors to buy BlackBerry. This is no surprise, and many pundits had pointed out the highly conditional nature of Fairfax’s bid at the time it was announced.
What may be surprising is why BlackBerry would make a deal when speculation of Cerberus and other interested bidders was swirling. The simple answer may be that these were merely rumors, and no real bidders had appeared. Another possible explanation is that Fairfax had hit the date for the deadline to make a real bid and was unable to extend it in good faith. Faced with the collapse of the Fairfax bid, the BlackBerry board looked for yet another face-saving transaction.
But all this is mere speculation, and I suspect the circumstances of the demise of BlackBerry’s attempted sale will come out in the coming hours and days.
If you examine the terms of the second BlackBerry announcement - the convertible debt investment - you get an idea of the company’s path forward. It isn’t pretty.
The deal, as outlined by BlackBerry, is that Fairfax and others will invest $1 billion in BlackBerry, purchasing BlackBerry convertible debt that pays 6 percent interest. This rate is not a bad return, particularly considering BlackBerry has assets worth quite a bit more than that. The debt will be convertible into BlackBerry shares for a period of seven years at a conversion price of $10 a share, meaning the conversion feature is worthless if BlackBerry’s shares are below that price. Fairfax will take up to $250 million of the $1 billion investment amount.
One way to look at this investment is that it positions Fairfax and the other investors for a BlackBerry bankruptcy. BlackBerry has no long-term debt on its balance sheet, so this investment would now jump Fairfax ahead of the equity line for controlling BlackBerry in any bankruptcy proceeding. And remember that BlackBerry is a Canadian company, so the bankruptcy would be there. Canadian rules are different than those of the United States, but they do allow the creditors to have a substantial say in any restructuring plan, including approving it.
But by structuring the investment as a convertible debt interest, one that is convertible into shares, Fairfax has it both ways. It protects its downside in a bankruptcy, but it also has an upside.
BlackBerry right now can be viewed as a binary play. It will either fail miserably or be a remarkable turnaround. Fairfax’s exercise price for these BlackBerry shares is a high premium over the current market price of about $6.90. But if any turnaround plan succeeds, the company will be worth far more. In some ways, the equity here is protection from the low chance of a BlackBerry turnaround.
The investment also gives BlackBerry some time to take itself out of the deal rumor mill and try to repair itself. BlackBerry’s current chief executive, Thorsten Heins, also announced his resignation on Monday. BlackBerry will have to find a new C.E.O. who is willing to take on this task, a tall order to say the least.
And so, the best spin on this investment is that it buys BlackBerry more time for an overhaul (or perhaps to get a bidder to change its mind), while also positioning some of its major investors to protect themselves if the turnaround effort fails.
