Earlier this week a consortium led by BlackBerry’s largest shareholder, Prem Watsa, made an offer in principle to take the struggling Canadian smartphone maker private, which its board agreed to.
While the US$4.7bn offer has been accepted, Watsa still…
Earlier this week a consortium led by BlackBerry’s largest shareholder, Prem Watsa, made an offer in principle to take the struggling Canadian smartphone maker private, which its board agreed to.
While the US$4.7bn offer has been accepted, Watsa still has six weeks to conduct due diligence and is yet to secure financing for the deal.
Fairfax Financial Holdings, which Watsa heads, is working on securing loans from BofA Merrill Lynch and BMO Capital Markets and is seeking equity partners. For its part Fairfax is not planning to increase its equity stake in BlackBerry, which currently stands at 10%.
Today Prem Watsa reiterated his commitment to do the deal, telling the Associated Press that he did no plan to lower his offer.
But according to analysts, much hinges on the value of BlackBerry’s patent portfolio, which could account for anywhere between US$800m and US$3bn of what the buyer will pay for the company – which has a market capitalisation of US$4.13bn.
Zarif Imam, head of client relations at Iceberg Capital Partners, explains that patents can be very difficult to value.
“Patent valuation is affected by many factors including technology, encumbrances and strategic value,” Imam said. “In [our] experience the level of due diligence undertaken by buyers has become very stringent. So, although there is speculation that [BlackBerry’s] patents are valued at between US$2bn to US$3bn, it is very difficult to come to a final number until that diligence has been finished.”
Imam said that sometimes valuations are based on previous transaction values, but that is not an accurate method as each patent is unique.
“From what [we] can ascertain [BlackBerry has] about 5,500 US-granted patents. The Nortel deal in 2011 was US$4.5bn for 6,000 patents and that, as well as the Motorola acquisition at US$12.5billion in 2011 [were] considered the high point of a bubble for patent transactions,” he explained.
Imam doubts that one buyer would come in for the whole portfolio, but instead expects it to be sold piecemeal. However, he adds that the consortium buying BlackBerry will likely want to keep hold of the company’s most important patents.
James Faucette, a senior research analyst at Pacific Crest Securities, estimates the value of BlackBerry’s patents lower than most industry watchers.
“We think [the portfolio] is probably worth US$1bn to US$2bn,” he said. Faucette qualified the figure by saying patent portfolios’ values vary widely based on the ability to convert the intellectual property into cash.
He had doubts over whether any of the Canadian business’s competitors would come in for the patents: “Most wireless companies already have unencumbered access to BlackBerry’s IP portfolio through cross licensing agreements.”
In Faucette’s opinion, as important as the valuation of the portfolio was, the deciding factor would be the future of BlackBerry’s enterprise business.
“The key question for Watsa’s bid is not has he valued IP correctly, but has he accurately anticipated the rate of decline of the service business and his ability to cut costs fast enough against that declining revenue stream?” he asked.
Imam also had doubts about BlackBerry’s long-term viability as a player in the service sector.
“The enterprise market has also become more competitive. Ten years ago almost every banker had a BlackBerry device, but now many banks have moved over to the iPhone.
“These decisions are made for a number of years as a lot of planning has to be done and many issues need to be considered so once you lose the market it is difficult to get it back.”
Questions raised over Fairfax offer
Faucette has his doubts that an offer from the Fairfax-led consortium will materialise and his scepticism is shared by Bernstein Research analyst Pierre Ferragu.
In a research note Ferragu said: “As more details, or lack thereof, emerge about the Fairfax takeover deal, the chances of the deal going through appear grimmer at most.”
He added: “Of the total $4.7bn required in the transaction, Fairfax is not committing any more than it already has when it increased its equity stake last January to about $480m total … The firm plans to finance the remainder through new equity injections (US$1bn) and bank loans (US$3bn). This appears to us unrealistic.”
Ferragu does not think that investors from outside Canada would be interested in getting in on the equity side and that even within the country only one or two pension funds might have some interest. He also did not think that US$3bn could be secured from the banks as the only sizeable collateral BlackBerry has is its patent portfolio, which Ferragu values at between US$800m and US$1.5bn, and a book value of US$1.7bn.
“In our view, the only way the deal can go through is with an industry participant with an interest in [BlackBerry Messenger] who will want to use offshore money to support the deal in a favourable tax framework.
“This scenario remains only remotely possible, as the best interest of such a participant would be to wait and see if Fairfax’s tentative deal falls through.”
Yesterday BlackBerry’s stock opened at US$8.34 while today it opened at US$7.98, but rallied to US$8.14 as this story went to press.
