With market value eroding, BlackBerry sale could be worth less

TORONTO—Analysts predict that Fairfax Financial will follow through on plans to buy BlackBerry, but could pay substantially less than originally announced as the smartphone maker’s market value erodes.

Fairfax announced Sept. 23 that it was leading a group that would offer US$9 per share, subject to a number of conditions.

But a reduced, $7-per-share bid is likely to materialize once Fairfax and its partners complete due diligence over the next month, said CanaccordGenuity analyst Michael Walkley.

Based on CanaccordGenuity’s assessment, BlackBerry would be worth about $1-billion less than Fairfax’s initial proposal, which valued the company at US$4.7-billion.

Walkley said he has reassessed the company’s assets to take into account various changes in the BlackBerry’s business, including the flagging hardware operations that were the main reason for a US$965-million loss in the company’s second quarter.

“Given our belief BlackBerry’s hardware business will struggle to return to profitability despite significant cost cuts and a refocus on more high-tier enterprise segments, we struggle to assign any value to the hardware business,” Walkley wrote.

“Our sum of the parts analysis values BlackBerry at roughly $3.75 billion.”

BlackBerry shares have fallen well below the proposed bid value since Fairfax announced the offer a week ago.

The company’s shares have fallen nearly 13 per cent on the TSX since the Fairfax proposal was announced.

Investors are skeptical that Fairfax will successfully complete the acquisition of BlackBerry because its quickly eroding market share and high operational costs create the kind of uncertainties that make investors and lenders nervous.

“We doubt a strategic investor will show interest, given the pace of decline in BlackBerry’s business,” wrote Stuart Jeffrey, an analyst at Nomura, who has reduced his target price to $8 in order to take into account risks to the current bid.

“With BlackBerry’s change in strategy now very public, we believe that operators, distributors, consumers and enterprise customers and partners will quickly drop their support for BlackBerry and look at alternatives.”

Fairfax head Prem Watsa made an attempt to calm those takeover concerns with a limited number of media interviews last week where he reassured the market that a deal would be done.

Despite his comments, BlackBerry’s stock price has continued to fall.

Jefferies analyst Peter Misek suggests Fairfax could also be forced to lower its offer for BlackBerry if Watsa is unable to secure the bridge loan required to move forward with the offer.

“The bid could be lowered to (approximately) $7 as a last resort,” Misek said.

“We think other bidders will be unlikely.”

The Fairfax offer is highly conditional and allows the firm some wiggle room to revise its price before making an official offer later this year.

Under the details of the tentative bid, Fairfax will not receive a break fee if it lowers the offer below US$9 per share without the approval of BlackBerry’s board of directors.

Analyst Richard Tse of Cormark believes that BlackBerry will have to make further cuts to its operations in order to become cash flow positive, but he maintains a $9 target on the stock price.

Regardless of how much BlackBerry sells for, the company will have another battle on its hands as it tries to regain the confidence of consumers.

A new study from Interbrand found the smartphone maker dropped off its Top 100 list of best global brands this year for the first time, after ranking a lowly 93 in the same chart last year.

The company ranked as high as 54 in 2010.