On Monday, shares of BlackBerry (NYSE:BB) rose more than 6% after it was reported that Fairfax Financial (OTCPK:FRFHF) recently held talks to buy the remainder of the company it did not already own. This news brought BlackBerry shares over $5 for the first time since early March, a staggering rebound from its coronavirus selloff low of $2.70. However, the rumor was denied on Tuesday, making one wonder what was truly going on here.
I’ve covered BlackBerry on this site since late 2011. We’ve gotten to the point where I can’t count the number of BlackBerry buyout rumors on one hand. Here are just three examples of these rumors (here, here, here), where almost every large cap tech name has been the potential acquirer at some point, from Microsoft (MSFT) to Samsung (OTC:SSNLF) to IBM (IBM). Every time, the stock has popped on these rumors, but they’ve not yet once been proven right. In the end, shares fall back and usually go even lower when quarterly results disappoint time and time again.
This rumor was a bit different, though. The acquirer would have been Fairfax Financial, which, at the end of March, was BlackBerry’s second largest institutional equity owner. Fairfax owns more than 46.7 million BlackBerry shares out of 554 million outstanding. However, Fairfax also owns $500 million of the $605 million in BlackBerry debt outstanding. That BlackBerry debt comes due this November. Barring a miracle, it will not be converted to equity at $10 a share since shares currently go for roughly half of that.
If the bonds are paid back, Fairfax will lose almost $19 million in annual interest it is receiving. If the bonds are refinanced like they were last time, I expect Fairfax will be a major player in the deal again. If someone else other than Fairfax acquires BlackBerry (see details on page 94 of annual filing), then an offer has to be made to repurchase the bonds at 115% of par. Of course, with the notes due in just over 5 months, the timing of that may not be applicable if a deal can’t be done before then.
Going forward, $6.50 is an interesting level to watch. That’s the price that BlackBerry shares closed at on the day when John Chen was named interim CEO back in 2013. I’m sure the company’s leader would like to see any buyout above that, but, of course, that’s a substantial premium over where shares have traded in recent months. It doesn’t help the situation that many new age tech names are soaring to market caps of at least $20 billion, like Cylance competitor CrowdStrike (OTC:CRWD), Zoom Video (NASDAQ:ZM), Splunk (NASDAQ:SPLK), etc., while BlackBerry remains with a sub $3 billion market cap.
The reason it is so hard to predict a potential buyout price is that valuations in this market are all over the place. Since most of these new tech names don’t have GAAP profits, P/E ratios are not calculable, meaning price to sales is usually the most meaningful metric to look at. BlackBerry trades at 2.6 times its current fiscal year’s expected sales, which is almost IBM-like dead business territory, while the new age names I mentioned above go for double-digit times their sales. For example, Zoom goes for over 61 times expected yearly sales, and CrowdStrike is at 28 times. Both of those two report quarterly earnings on Tuesday. Of course, these newer names are growing their top lines quite dramatically, while BlackBerry revenues are mostly flattish and roughly 95% off their all-time high.
In the end, BlackBerry shares popped on another buyout rumor, a scenario we’ve seen time and time again, only for the rumor to be denied on Tuesday. This time though, it was a major holder of the company’s shares and bonds, not a major tech player, that was mentioned as the potential acquirer. Some might consider BlackBerry ripe for the picking with an unhappy investor base, with shares at the lower end of their multi-year range. I was skeptical when this rumor came out Monday, given the history of BlackBerry takeover rumors, and Tuesday’s news basically confirmed that skepticism again.
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