BlackBerry Ltd. may have found a white knight to save it.

The company said Monday afternoon that it has signed a letter of intent with a consortium of investors led by Toronto’s Fairfax Financial Holdings Ltd. to take the company private for US$4.7 billion. Fairfax is the company’s largest shareholder.

The deal is subject to the consortium looking at BlackBerry’s books to conduct due diligence.

According to a news release, the letter of intent contemplates BlackBerry shareholders getting US$9 a share in cash for in a transaction valued at approximately US$4.7 billion. The consortium would acquire for cash all of the outstanding shares of BlackBerry not held by Fairfax. Fairfax, which owns approximately 10 percent of BlackBerry’s common shares, intends to contribute the shares of BlackBerry it currently holds into the transaction.

The BlackBerry board of directors, acting on the recommendation of a special committee of the board of directors formed last month, approved the terms of the letter of intent. The consortium is seeking financing from BofA Merrill Lynch and BMO Capital Markets.

Signing the letter of intent is no guarantee the deal is done. Not only does BlackBerry [TSX: BB] have to pass the due dilligence test — to be completed by Nov. 4 – a final contract has to be negotiated. Even if the company goes private there is so far no assurance that the new owners will keep BlackBerry intact.

The letter of intent is not a contract: BlackBerry can look for other organizations willing to pay more until Nov. 4.

In a statement Fairfax CEO Prem Watsa — who was on BlackBerry’s board from early 2012 until last month and should know the company well — said that “We believe this transaction will open an exciting new private chapter for BlackBerry, its customers, carriers and employees. We can deliver immediate value to shareholders, while we continue the execution of a long-term strategy in a private company with a focus on delivering superior and secure enterprise solutions to BlackBerry customers around the world.”

If the deal goes as planned, the consortium wouldn’t be paying much — if any — premium for BlackBerry. Just before the announcement trading was halted and the price was CDN$8.485 a share on the Toronto Stock Exchange.  When trading resumed eight minutes later the share price jumped briefly to CDN$9.45 on the Toronto Stock Exchange before settling to close to CDN$9 (on the Nasdaq shares were US$8.815).

The consortium’s hope is that BlackBerry’s finances and strategy can be straightened out and the company can go public again at some point in the future so the investors can get their money back.

BlackBerry had looked like it was starting to turn around in the spring after it launched its next-generation Z10 and Q10 smart phones. In mid-June shares were in the CDN$15 range. But at the end of the month it released an unpleasant report showing an $84 million loss in the previous quarter, having sold 6.8 million smart phones. That was up only slightly from the 6 million in the quarter before. It was the first sign that buyers weren’t flooding stores to buy the new handsets.

A bigger sign came in August when BlackBerry announced a special committee had been formed to actively look at all options. Then on Friday, faced with media reports that it was about to layoff a stunning 4,500 people, the company issued a statement in advance of this week’s release of the latest quarterly financial results not only confirming the layoffs but admitting it has to write off almost $1 billion in unsold handsets.

The immediate reaction on CrackBerry, an enthusiasts Web site, was mixed. A number of writers who say they are shareholders damned the deal as too little. Others said it was the best offer the company could get, and it would help keep BlackBerry afloat.

“This is good for BlackBerry because Fairfax is in Canada,” Ron Gruia, telecom industry analyst at Frost & Sullivan, said in an interview.
“This will give BB a reprieve from doing (public) financial reporting and allow them focus in on what they said they would do — be more focused on enterprise, cut the number of handsets to four.”

Some financial analysts believe Apple’s iPhone and handsets that use Goolge’s Android operating system have taken so much of the market there isn’t room for another competitor. These analysts are calling for BlackBerry to be broken up and sold. But Gruia argues BlackBerry has a lot to offer — a company that makes handsets, an operating system and runs a secure network.

Fairfax, said to be Canada’s largest property and casualty insurer, is a financial services holding company. Last month the company announced a net loss of US$157.8 million in the second quarter compared to a profit of $93 million for the same period in 2012. Still, it held US$1.2 billion in cash and equivalents at the holding company level.

For the year ending Dec. 31, 2012 Fairfax had a profit of $532 million compared to $45 million in 2011 (a year in which it suffered  “catastrophic” underwriting losses from Hurricane Sandy).

Dubbed by the press as a canny investor, Watsa has been chairman and CEO of Fairfax since he found it in 1985.  Chancellor of the University of Waterloo, and a governor of the Royal Ontario Museum, in 1997 he was given a business leader award by the University of Ontario’s Ivey School of Business. He joined the board of BlackBerry (then called Research In Motion) in January, 2012, the same time as Thorsten Heins was elevated to CEO from being co-chief operating officer.

 

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