Sep 302013
 

At this point, I have a hate/hate relationship with Blackberry. I hate that I bought it a full $5 a share ago, and I hate that they had second quarter results so bad that they felt the need to prerelease them into the market a full week early. You can go and read the carnage here, maybe after having an alcoholic beverage and having your crying towel fully prepped.

(A single tear falls slowly down my cheek) Let’s move on.

Luckily for beleaguered shareholders, white knight Prem Watsa (of Fairfax Financial fame) came in to save the day, offering investors $9 (U.S. $) per share for the 90% of the company he doesn’t already own. Here’s an artist’s recreation of my reaction.

phew1

 

As much as it pains me to say this, Blackberry’s recovery is about done. The touchscreen model flopped worse than a fat guy off the high diving board. The model with the physical keyboard is doing a little better, but the company is still getting their ass kicked by the combined juggernaut of Apple and Samsung. They’ve still got a decent chunk of the enterprise business, but that’s slowly being chipped away as people insist on bringing their own devices to work.

The bottom line? I got Blackberry so wrong. If I were you I’d never listen to anything I said again…

You’re still here? Sucker.

Even though I should just take my loss and go home, I just can’t. Blackberry is my kryptonite, which apparently makes me Superman. (Looks down, doesn’t see rippling muscles, gets sad) So instead of going away, let’s look at whether we can make some money on the merger arbitrage.

As I mentioned earlier, Watsa offered $9 U.S. per share for the company in his buyout offer. Friday’s close was $8.03. That’s a huge gap. The two parties also agreed on giving Watsa a six week period to examine the books, meaning you’re at least getting a decision relatively quickly.

Watsa doesn’t just have $4.7B kicking around, so he needs to raise the money. Like any smart financier, he’s trying to do so all while taking as little risk as possible, as he plans to hit up pension funds for the majority of the debt needed to do the deal.

As the nearly $1 difference between Blackberry’s current price and the offer price indicates, the market isn’t too confident the deal is going to close. I’ve heard rumors that Watsa just made the offer to prop up the share price, thus protecting his almost $500M investment in the company. There’s also no breakup fee if he decides to pass, (there’s also a 30 cent per share payout to Watsa if the company secures a higher bid in the meantime) meaning he’ll have no financial penalty if Fairfax walks away from the deal.

Watsa is also saying the right things. From a Wednesday interview:

We wouldn’t put our name to such a high-profile deal if we didn’t feel confident that at the end of the day that our due diligence would be fine and we’d be able to finance it.

And, on Fairfax’s track record. This is the man who has been called the Canadian Warren Buffett, remember.

Asked if the bid price could be reduced, Watsa said he didn’t expect that to happen unless the review of BlackBerry produced negative surprises. He said Fairfax had never changed the terms of a deal in 28 years.

Watsa does have a history of doing deals like this, most recently in 2011, as he led a consortium of investors who rescued Bank of Ireland from being nationalized. Watsa’s stake in the Bank has more than doubled since.

We have a company with a clear need to work on its turnaround privately. We have a buyer who can probably raise the capital needed to get the deal done (don’t underestimate the pride Canadians have for Blackberry. It’s still our tech darling). We also have a buyer who has consistently closed on the deals he undertakes. I realize there’s risk here, but I think it’s severely overstated, and certainly isn’t worth some 12% of the share price.

Assuming the deal doesn’t go through, what’s the floor for Blackberry? The stock fell to $8.20 before the takeover bid was announced, a level higher than it is now. Book value is a somewhat useless value too, since it currently sits at approximately double the $8 share price. Hell, the value of just the company’s cash and patents is over $11 per share. Even just the $2.57B in cash the company has translates into $4.90 per share. Cash plus receivables works out of $8.22 per share. All Watsa needs to go is collect all the money owed to the company and he’ll recoup a full 90% of his purchase price right there. Yes, Blackberry is losing a lot of money right now, but the company still gives Watsa a reasonable margin of safety at these levels.

Because of the huge premium between Blackberry’s current price and the offer, this merger arbitrage deserves a closer look. You’ll make some decent cash if you get it right.

 

Tell everyone, yo!

  5 Responses to “How About A Little Blackberry Merger Arbitrage?”

  1. I bought some around $8. I assumed the downside would be ~$5 as people would take it for a broken company, bleeding that cash pile before a wind-up, but that’s a pretty safe worst case IMHO. Some quick back-of-the-envelope math suggests then that if I’m 88% sure or better that Prem will buy at $9, the arb attempt is worth it.

    The deal is, as you point out, very loose: they can walk away with no penalties, and if it was anyone else that would scare me right off. So this is entirely due to Prem’s reputation.

  2. I still have the crying towel beside me from my small position in Reitmans :(. Mama told me not to chase yields!

    What was that part above I read about never listening to you again? I must have Alzheimer’s, but I don’t really remember if I do.

  3. Not sure if there is a market for it, but why not sell covered calls on your position at 11 or 12? Reduce some of the exposure.

  4. […] I talked about doing merger arbitrage when his company – Fairfax Financial (TSX:FFH) – bid $9 U.S. per share of Blackberry. That takeover obviously didn’t go through, which is reason number 3,201 you shouldn’t […]

  5. […] the last time I told you kids to play a merger arbitrage? It was when Prem Watsa announced he was looking to take over BlackBerry at $9 (U.S.) per share. […]

 Leave a Reply

(required)

(required)