TORONTO – After weeks of weighing a buyout of BlackBerry, the company’s largest stakeholder will instead lead a group that lends US$1 billion to the struggling smartphone maker in hopes it can revamp its operations.
Fairfax Financial said Monday it has scrapped plans to purchase BlackBerry (TSX:BB) outright, but will lead a group of investors that will inject funds into the Waterloo, Ont.-based company, which will be under new management.
The news sent BlackBerry shares (TSX:BB) plunging to their lowest level in years, dropping 99 cents or 12.4 per cent to C$7.09 on the Toronto Stock Exchange and 90 cents to US$6.82 on the Nasdaq.
Both BlackBerry chief executive Thorsten Heins and the chair of its board of directors, Barbara Stymiest, would be replaced by John Chen, who has experience in the technology sector, when the deal closes.
Among other things, Chen was chairman and CEO of Sybase from 1998 until the data management company was acquired in 2010 by SAP AG. Prior to Sybase, Chen held executive positions at Siemens AG, Pyramid Technology Corp., and Burroughs Corp.
BlackBerry’s board will also make room for a return of Prem Watsa, who is president and CEO of Fairfax Financial. Watsa originally joined the board when the company was still called Research and Motion but left before BlackBerry held a strategic review in August, due to a conflict of interest.
He eventually announced on Sept. 23 that Fairfax would lead a group that would pay US$9 per BlackBerry share — about $4.7 billion — although there were many conditions attached including a six-week period for due diligence.
In an interview with The Associated Press, Watsa said they worked with a consulting company that recommended taking BlackBerry private with borrowed money was not the best option.
“To load this company with too much debt was not appropriate,” he said.
“We probably could do it, but we decided not to add high yield debt to the company’s structure.”
Fairfax backed off completely on a leveraged buyout after that getting the recommendation, even though five or six investors had been interested, Watsa said.
Under the current arrangement, Chen will become interim CEO of BlackBerry and a more permanent role as the executive chairman of the board. Heins will leave the company once the agreement is finalized.
Earlier this year, BlackBerry agreed to a compensation package for Heins that hinged on exactly the circumstances that ousted him from the top position.
Under securities filings, Heins would be paid as much as $55.6 million if BlackBerry was sold and he was removed from the top job. The amount factored in his salary, bonus, benefits and equity awards based on the company’s share price at the end of the latest financial year.
However, the agreement said if Heins were to be removed from his job at BlackBerry without a change of ownership, he would receive a smaller package valued at $22 million.
BlackBerry spokeswoman Rebecca Freiburger said the company was “not in a position to comment about Thorsten Heins’ severance at this time.”
Carmi Levy, an independent tech analyst, said Monday’s announcement wasn’t the end of a possible BlackBerry sale, but it was clearly not what the company had hoped for when it put itself on the block.
“It would have been so much simpler for them to just accept a cheque from a large suitor and be bought out,” said Levy.
“They already admitted a year and a half ago they couldn’t go it alone; now they have to go it alone. There’s no good news in this story at this point. It adds an additional layer of challenge to a company that didn’t need it.”
The new plan is for Fairfax to lead a group that will buy US$1 billion of convertible debt — a type of security that will pays six per cent interest annually but can be converted into BlackBerry shares at US$10 each.
“This financing provides an immediate cash injection on terms favourable to BlackBerry, enhancing our substantial cash position,” Stymiest said in a statement.
The billion dollars will buy the company some time to turn itself around, Levy said, and noted that Chen was a good choice to lead BlackBerry because he’s someone with credibility in the mobile enterprise space.
“He recognized the value of this technology long before many others in the industry,” Levy said. “If anyone’s going to return credibility to Blackberry’s reputation in this space, it will likely be him.”
But while he still sees the sale of the BlackBerry as a likely outcome, given the various other suitors who had expressed interest in the company, Levy said any additional bids will likely cheaper than what had originally been proposed.
“Investors have already voted with their feet. Share values are down significantly in pre-market trading because a number of them have decided enough is enough,” Levy said.
“This was a bad situation to begin with, it got worse throughout, and unfortunately for some investors, they reached the point of no return.”