Jack Ellis

BlackBerry announced yesterday that it has signed a letter of intent agreement which would see it taken into private ownership by a consortium led by Fairfax Financial Holdings, subject to due diligence. The planned deal follows indications from BlackBerry back in July that it would be exploring strategic options for its future, including the possibility of asset sales or an outright sale of the company.

Under the terms outlined in the letter of intent, the Fairfax-led consortium would get BlackBerry outright for approximately $4.7 billion, subject to negotiation of a definitive agreement to acquire, granting of the  necessary regulatory approval and undertaking necessary due diligence, which is expected to be completed by early November. During this diligence period, BlackBerry will be able to ‘go-shop’ in order to consider any potentially better offers from third parties. If any such alternative offers are made and accepted, the company will be required to pay the Fairfax-led consortium a termination fee. It could be, therefore, that the Fairfax bid is essentially a stalking horse designed to bring out other potential bidders. There have been rumours, for example, that Chinese companies such as Lenovo, Huawei and ZTE might be interested in a purchase, though more recently it seems as if any interest that there might have been has cooled.

As BlackBerry – formerly Research In Motion – has seen its fortunes take a turn for the worse in recent years, many commentators have talked down the value of its operating business and other assets, and have instead focused on the value that its patents may have to potential buyers. In June 2011, National Bank Financial’s Kris Thompson valued the company’s portfolio at as much as $5 billion. If that valuation is anywhere near accurate, then Fairfax and its consortium partners will have got themselves a bargain should they end up as the new owners. But other estimates have been more conservative, with Jefferies & Co analyst Peter Misek placing a total liquidation value of $2.5 billion on the patents in September 2011. More recently, Shawn Wu of Sterne Agee said that such valuations were “optimistic” and suggested a “more appropriate” sale value for the patent portfolio of between $1 billion and $1.5 billion. That said, after considering data from Erin-Michael Gill of MDB Capital which was presented in issue 58 of IAM, Canada’s Scotiabank doubled its valuation of the BlackBerry patents to $2.25 billion.

The possibility of generating cash from selling the patents may be one of the factors that has enticed Fairfax. But the huge variances in valuations of the portfolio means that it is going to be difficult to ascertain just what price they may be likely to get for it. Prospective buyers of BlackBerry should also consider what happened in the Kodak patent sale, where several market participants teamed up and were able to purchase the patents collaboratively at a price that could well have been far lower than if they had competed against each other as individual buyers.

Of course, sale of the patents may not feature in the Fairfax-led consortium’s plans for the company (or the plans of any other buyer, should BlackBerry decide to strike a different deal during the diligence period). Analysis by Envision IP suggests that many of BlackBerry’s patents may be more valuable in terms of licensing potential, rather than the money that could be made from selling them. BlackBerry also maintains its stake in Rockstar and could continue to derive significant revenues from that company’s patent monetisation efforts. In the press release announcing the signing of the letter of intent, Fairfax chairman and CEO Prem Watsa says that the prospective buyers would “continue the execution of a long-term strategy in a private company with a focus on delivering superior and secure enterprise solutions to BlackBerry customers around the world”. Patent licensing and assertion could prove to be a highly profitable sideline to that.