‘Canadian Buffett’ may struggle to save BlackBerry; Value investor Prem Watsa may struggle to squeeze more value from BlackBerry.

‘Canadian Buffett’ may struggle to save BlackBerry

Alistair Barr and Scott Martin, USA TODAY7:33 p.m. EDT September 23, 2013

Value investor Prem Watsa may struggle to squeeze more value from BlackBerry.

STORY HIGHLIGHTS

Investor group led by Watsa’s Fairfax offers $4.7 billion in cash for BlackBerry

Going private may give struggling handset company freedom to reorganize

BlackBerry’s struggling handset business may tarnish rest of the company

BlackBerry shares edge higher but stay below $9 offer price

SAN FRANCISCO — Prem Watsa, a successful value investor known as the “Canadian Warren Buffett,” may struggle to squeeze any more value out of his investment in floundering mobile company BlackBerry. BlackBerry said Monday it is working on a deal to be acquired by a group of investors led by Fairfax Financial Holdings, the insurance business run by Watsa. The deal, which is subject to due diligence, further negotiation and regulatory approval, would pay BlackBerry shareholders $9 a share in cash for a total value of about $4.7 billion, the company added.BlackBerry shares jumped to $9.20 a share briefly but closed up 1.1% at $8.82, noticeably below the $9 offer price, suggesting Wall Street thinks there’s not much upside for the formerly high-flying smartphone maker despite trading volume that was triple the daily average.

“Dismantling and selling the various assets — I think that’s the only thing they can do,” said Gartner analyst Carolina Milanesi.

One hedge fund manager compared the proposed BlackBerry deal with Microsoft’s purchase of Nokia and Hewlett-Packard’s acquisition of Palm, describing them all as big mistakes. The manager did not want to be identified.

Gartner’s Milanesi also compared BlackBerry with Microsoft and Nokia, saying these companies were once so dominant that they assumed they had time to adjust to new developments in the smartphone market.

“That’s not true,” she added. “BlackBerry was not moving fast enough” and took too long to release its new BB10 devices and operating system.

The result has been the loss of about 95% of BlackBerry’s market value in recent years as the Canadian company fell behind Apple and Google’s Android in the fast-growing smartphone market.

Watsa, who has an impressive track record as a value investor, plans to take BlackBerry private and refocus the company on services for companies and other enterprises. Watsa already owns about 10% of BlackBerry shares through the Fairfax insurance business he oversees. That stake will be contributed to the planned $4.7 billion deal.

“I would not rule them out,” said Jeff Fenwick, who covers Fairfax as an analyst at Cormark Securities in Canada. “They are serious about this offer and would not go into this if they did not feel there was intrinsic value in the company still.”

In a letter to Fairfax shareholders earlier this year, Watsa said he was excited about BlackBerry’s prospects under the new leadership of CEO Thorsten Heins and the “technical genius” of founder Mike Lazaridis, who is a friend of Watsa’s.

However, BlackBerry’s business has deteriorated rapidly since then. The company warned of a big quarterly loss late last week and said it would cut 4,500 jobs as sales of its newest smartphones failed to take off.

Watsa’s 10% stake was purchased for an average price of about $17 a share, so the investor is already sitting on a sizable loss. And Fairfax is not contributing any more equity to the buyout that was proposed Monday, according to Cormark’s Fenwick. A representative at Fairfax declined to comment.

BlackBerry’s days as a mobile device maker are likely numbered, but the company has other businesses, such as its BBM messaging service and a mobile device management offering that is used by companies and other large enterprises.

Watsa said in a statement Monday that BlackBerry’s long-term strategy as a private company will be to focus on providing “superior and secure enterprise solutions.”

Jefferies analysts, led by Peter Misek, recently surveyed IT executives at 50 large companies and found that 18% were planning to use BlackBerry’s mobile device management system, BES 10, to run non-BlackBerry devices. This either matches or beats other companies in this business, including AirWatch, SAP and MobileIron, the analysts noted.

However, few companies were planning to deploy BlackBerry’s new smartphones, and this uncertainty reduces the value of services businesses such as mobile device management and BBM, the Jefferies analysts added.

“The rumored pursuit of becoming a business-focused provider of mobile management software isn’t a growth strategy,” said Eugene Signorini, vice president of mobile insights at Mobiquity. “That space is already well populated with emerging leaders such as AirWatch and MobileIron, and should be ceded to them.”

With even BlackBerry’s services businesses under pressure, a break-up of the business may be more likely.

BlackBerry is being valued mainly based on its $2.6 billion cash hoard and its patents, according to Brian Colello, an equity analyst at Morningstar.

“I don’t see any way one could assign ongoing value,” he said.

The investor group said Monday that it plans to complete due diligence and strike a definitive deal by Nov. 4. Between now and then, BlackBerry is allowed to pursue other possible deals. However, if an alternative deal is reached, BlackBerry has to pay Fairfax a termination fee of at least 30 cents a share, the company said.

“Can BlackBerry ultimately survive? That’s not as clear,” said analyst Jack Gold of research firm J. Gold Associates. “But given six to 12 months of ‘under the cover’ ability to do what is needed, it could be a much more attractive acquisition target at the very least.”