Fairfax mulls taking BlackBerry private - The Globe and Mail

Fairfax Financial Holdings Ltd. is exploring ways to take BlackBerry Ltd. private, according to people familiar with the situation, prompting Fairfax chairman Prem Watsa’s departure from the smartphone maker’s board on Monday.

There was no strategic disagreement between Mr. Watsa and the board, and all sides would have preferred he remain a director, according to these sources, who spoke on condition of anonymity. But Mr. Watsa stepped down in order to avoid criticism that he was in a conflict of interest.

BlackBerry, based in Waterloo, Ont., said its board of directors has formed a special committee to explore “strategic alternatives,” including the possible sale of the company. The shares were up more than 10 per cent, to $11.13, in late afternoon trading in Toronto.

Fairfax, which owns 9.9 per cent of BlackBerry and is its largest shareholder, is holding talks with a number of private equity and industry players to assess which ones might be interested in participating in a buyout, sources said. The investment company, which Mr. Watsa controls, has indicated that it intends to retain its stake in BlackBerry and feels that the market is undervaluing the firm.

BlackBerry has a market capitalization of about $5.8-billion. It had nearly $3-billion in cash and short-term investments as of June 1 and no debt.

Part of the rationale for going private would be that the company’s every move is under quarterly scrutiny right now from dozens of analysts, and that the criticism of its performance in the public market is a distraction to management. Being out of the public-company limelight would give BlackBerry more freedom and time to pursue different paths.

Sources indicated that at the same time Fairfax speaks to potential partners for a going-private transaction, the board and its bankers will be canvassing the market for other alternatives.

BlackBerry’s potential buyers can be split into two categories – financial and strategic.

The strategic side includes companies that could make use of BlackBerry’s central assets – such as its network operating centres, its security features and the popular BlackBerry Messenger application. Many of these companies are currently BlackBerry’s direct competitors. And some, such as Microsoft Corp., have been mentioned in acquisition rumours for many years. But some analysts are not convinced these companies, having leapfrogged BlackBerry in the smartphone market, are all that interested.

“Google, Apple, Microsoft – I don’t see them doing that,” said BGC Financial analyst Colin Gillis. “They each have their own platforms. Amazon? I doubt it. Samsung? Maybe, but I doubt it.”

Samsung might have reason to look in BlackBerry’s direction in part because the South Korean company is becoming concerned about its reliance on Google Inc.’s Android operating system, which now powers virtually all of Samsung’s best-selling smartphones, Mr. Gillis said. However he is still skeptical that there’s enough reason for Samsung to seriously consider making a run at BlackBerry.

As such, BlackBerry may be more likely to find a financial buyer. Last week, Reuters reported that BlackBerry had discussions with private equity firm Silver Lake Partners about a collaboration in enterprise computing, citing an anonymous source. Silver Lake is also a major player in efforts by computer-maker Dell Inc. to go private.

This isn’t the first time BlackBerry has formally announced it will explore “strategic alternatives.” It did so last year, but did not form a committee. At the time, the company’s share price was hovering around the $7 mark – a low not seen in almost a decade.

BlackBerry’s five-person special committee, which includes CEO Thorsten Heins, will look at a host of options, such as joint partnerships or alliances with other companies, in an attempt to increase shareholder value and boost sales of the company’s new BlackBerry 10 smartphones.

“During the past year, management and the board have been focused on launching the BlackBerry 10 platform ... establishing a strong financial position, and evaluating the best approach to delivering long-term value for customers and shareholders,” said Timothy Dattels, chairman of BlackBerry’s new committee. “Given the importance and strength of our technology, and the evolving industry and competitive landscape, we believe that now is the right time to explore strategic alternatives.”

A merger or privatization would insulate BlackBerry from investor scrutiny as the company undertakes what has been a long and painful transition to a new operating system and line of smartphones. Even as BlackBerry began releasing those new devices earlier this year, the phones have not gained as much traction with consumers as many investors and analysts had hoped, and BlackBerry’s share price has taken a subsequent beating following poor quarterly earnings reports.

Since his appointment as CEO in January of 2012, Mr. Heins has repeatedly stated his preference for a turnaround strategy based on creating and selling new products, rather than selling the company itself. However he has also said publicly on several occasions that no option is off the table, including putting the company up for sale.

JP Morgan Securities LLC is advising BlackBerry during the process, and Skadden, Arps, Slate, Meagher & Flom LLP and Torys LLP are serving as legal advisers.