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Here's Why Prem Watsa Will Follow Through on His BlackBerry Offer

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Sometimes I can't help but wonder if BlackBerry's (NASDAQ: BBRY  ) pain will ever end.

On Monday, shares of the beleaguered smartphone maker closed at $7.95 per share, less than six years after the stock hit its peak above $144 per share in 2008.

And that's also despite the fact that, a little over a week ago, BlackBerry announced it had signed a letter of intent to be acquired for $9 per share by a consortium of investors led by Canadian insurer, Fairfax Financial  (NASDAQOTH: FRFHF  )   (TSX: FFH  ) , which so happens to be run by renowned value investor Prem Watsa.

Blood in the streets
The timing of the deal was notable, especially considering BlackBerry had just pre-announced selected earnings results, which, in turn, drove the stock down by 17% to close the previous week at just $8.82 per share. But despite that buyout offer, shares of BlackBerry have continued to fall amid doubts the acquisition will go through.

Now I'll admit I've given BlackBerry a hard time so far this year, but Prem Watsa's optimism has long remained a big wildcard for me.

After all, he's often called the "Warren Buffett of Canada" given his penchant for making the most of beaten-down assets -- and its no mystery I respect Mr. Buffett --  so I was inclined to take Watsa seriously when he defended his bid last week, saying: 

We've got a track record of 28 years of completing what we've done. We've never renegotiated. We thought long and hard before we offered $9 dollars a share and we're not in the business of offering a number and at the last minute changing the figure. Over 28 years our reputation is stellar on that front. We just don't do that.

Of course, I can understand investors' nervousness considering Watsa, who already owns 10% of the company at an average cost basis of $17 per share, hasn't identified the remainder of the buyout group or obtained committed financing for the deal.

What's more, Watsa gave himself a full six weeks to allow for adequate due diligence, saying a final offer will be presented by November 4. That gives investors plenty of time to continue worrying the deal will fall through. 

A level head during turbulent times
But more encouraging, however, were Watsa's level-headed, Buffett-esque comments on BlackBerry late last week : 

The market's very emotional. You'll find huge optimism when everything's going well, huge pessimism when things are not working out as well. And what we say is the truth is in between. If you read the press and you read these analysts, it looks like [BlackBerry] is going bankrupt. And five years ago it looked like RIM controlled the world. And both views are wrong. It wasn't one, we found out, and we're suggesting to you with humility that the second one is wrong.

What's more, Watsa has already stated he has no delusions BlackBerry has any hope of competing over the long term in the consumer market. Rather, he says, it's BlackBerry's world-class enterprise solutions they're after -- and you can bet that's factored into his offer.

Now, Watsa says, their task is to do their due diligence "to figure out what's needed to finance it over the long term, and then [raise] the money to have a capital structure that will help the company over the long term. We want BlackBerry to survive for a long time."

Notice, Watsa didn't say he was completing his due diligence to determine whether he actually wants to buy the company. Right now, he simply needs to confirm that they'll raise enough capital to ensure BlackBerry will have what it needs to get back on its feet and refocus entirely on the enterprise market.

Curiously enough, if you recall back in July, my eyebrows were raised when CEO Thorsten Heins effectively told investors at the company's shareholder meeting they were wrong in attempting to place a value on BlackBerry by measuring only device sales. Specifically, Heins said,

While many will judge our short-term success on unit sales in a single quarter, we are not a device-only company, [and] creating value for shareholders does not involve being everything to everyone.

Unsurprisingly, Heins stopped short of admitting BlackBerry couldn't compete with the likes of Apple and Samsung in the consumer market back then -- something the company itself indirectly admitted in last week's release by saying it would reduce its smartphone portfolio from six devices to four and "refocus on [the] enterprise and prosumer market."

Sure enough, the one bright spot in BlackBerry's earnings report stood BlackBerry Enterprise Service 10, which increased its total number of servers installed by more than 31% to 25,000 since July, 2013.

Does Watsa care, then, that BlackBerry's consumer business is essentially imploding as mobile carriers threaten to stop selling its consumer devices in their stores? I sincerely doubt it.

Now don't get me wrong; This doesn't entirely negate the threat of Apple or Samsung attempting to step in and take over BlackBerry's enterprise fortress in the coming years, but you can bet Watsa is all too familiar with those risks as well.

Foolish final thoughts
Time will tell whether his plans will succeed over the long run, but you're kidding yourself if you think the calculating, ever-rational Prem Watsa hasn't thought this through.

That's why, in the end, I'm convinced Watsa will follow through on his offer.

These stocks might be better long-term options
Of course, Watsa's $9-per-share offer still only represents only a 13% premium to yesterday's closing price for BlackBerry, so it's up for debate whether it's worth the short-term risk.

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Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 01, 2013, at 8:59 AM, cbglobal wrote:

    Fairfax only needs $1.8 Billion net Blackberry's own cash to buy the 90% percent they do not own. Fairfax as of last quarter had $7 Billion in the bank. They do not even have to secure additional financing if they so desire.

  • Report this Comment On October 01, 2013, at 9:24 AM, BR14 wrote:

    Looks to me like blatant stock price manipulation.

    But the noise makers have been doing this to BlackBerry for so long they believe they're immune to prosecution.

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5/27/2016 4:00 PM
BBRY $7.23 Up +0.06 +0.84%
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Fairfax Financial CAPS Rating: ****