BBRY workout

jamesmith

BlackBerry Enters into Letter of Intent with Consortium led by Fairfax Financial. Fairfax came up with a $9/share or $4.7B bid for Blackberry. BBRY is currently trading at $8.6.
Here's the my estimate for the potential workout:
Current Price: 8.6
Deal Price: 9
Chance of deal: 90%
Upside: 0.4
Chance of no deal: 10%
Downside: 0.6
Expected Return adjusted for risk: 3.49%
Estimate Time to Complete: 4 months
Annualized: 10.47%

Here's why I think it has 90% chance of going through:
1) Prem Watsa is a friendly stake holder for a long time with 10% ownership
2) The company wants to be kept complete in Canada
3) termination fee $0.5/share, estimated up to $250 million
source: http://press.blackberry.com/fina ... rtium-led-by-f.html

Due Dilligence will take 6 weeks, after that if no higher bidder comes, I am guessing deal should be completed within 3 monthes. Of course longer it take to complete, lower our annualized return.

Risk is lowered by the drop last Friday, most of the negative impact by the earning report(coming this Friday) should be factored in. A saver play is the wait after this weeks report.

In last Friday's report, BBRY said it has > 2.5B cash and no debt. Fairfax's 4.7B bid value BBRY's business at 2.1B. In June's ER, Blackberry valued its Intellectual properties(patents) at 3.33B, Let's take a 2/3 haircut, it should at least have 1B value. That values rest of the 3.5B tangible assets at 1.1B. This is a value with a good margin of safety. If we break the company apart and sell them all now, it is save to say that we can get $9 or more per share. Sounds like a good deal to me, I am buying shares.

mitwkwk

我觉得bbry没戏。。。

jamesmith

mitwkwk 发表于 2013-9-24 09:56 AM
我觉得bbry没戏。。。

You think the buyout offer won't go through? I would like to know what made you think it won't go through, because I have shares now.

mitwkwk

我是觉得如果buyout能行，现在已经price in了。

水明善

just read today's WSJ, some concerns:
1. audit may bring with uncertainty;
2. the buyer needs to raise capital of 1.6B;
3. very little chance to have new bid offers;
so the max. return can be annualized 10%, but how is the risk?

jamesmith

水明善 发表于 2013-9-24 01:49 PM
just read today's WSJ, some concerns:
1. audit may bring with uncertainty;
2. the buyer needs to r ...

Yes, all are valid concerns. When I checked early today, news said BBRY's founder with 6% stake didn't respond for comment. So I don't know if the founder is in the deal with Fairfax. New bidders are unlikely that's why Fairfax's bid price is so low. There is uncertainly, that's why the price gap widened from $9 today.

Let me try to explain my reasoning.
1. I see the uncertainty during due diligence period to be low. Fairfax bought Blackbery at Q3, 2010 and continuously added.
Period                Shares         % of Portfolio        Activity       
2013   Q2         51,854,700         22.71                        
2013   Q1         51,854,700         29.04                        
2012   Q4         51,854,700         25.54                        
2012   Q3         51,854,700         20.89         Add
2012   Q2         26,848,500         10.97                        
2012   Q1         26,848,500         18.72         Add
2011   Q4         12,798,300         10.64         Add
2011   Q3         11,798,300         12.29         Add
2011   Q2         8,373,300            8.88         Add
2011   Q1         2,065,000            4.18                        
2010   Q4         2,065,000            4.74                        
2010   Q3         2,065,000          5.08         Buy        

It is one of the largest position in their public equity portfolio. Prem Watsa was on the board of Blackberry until August this year. They have a good understanding of what they are bidding for. Some people on Seeking Alpha think Prem Watsa is bluffing and trying to get new bidders, I don't think this is the case. Imagine we are at his place owning 10% of BBRY, why would we bluff?  knowing it is unlikely to get new bidders. Fairfax wants to buy the whole thing cheap at $9. They added a termination penalty that goes up to $262 million if BBRY back out of the deal with a new bidder, this makes it even harder to get new bidders, because new bid have to be considerably higher to be attractive to shareholders. If he is trying to get new bidder by bluffing, such term should not have been setup. Also Prem Watsa is considered by many the Warren Buffett of Canada, I don't think he will risk his reputation by bluffing this deal.

2. Prem Watsa doesn't wants to contribute anymore of Fairfax's cash to the deal and very likely that all the financing will be done using BBRY's asset as collateral(typical leveraged buyout). We don't know who else is in the deal, let's assume only Fairfax is in it. They have 10% of BBRY, and BBRY have $2B cash that can be used in the deal (it has to keep some cash to operate). That means $4.7B - 0.1*$4.7B - $2B = $2.23B must be borrowed against BBRY's asset. Using most recent data, Blackberry's book value = $9.399B, minus the $2B cash we took for the deal, that gives us $7.399B. Not an expert on this area, but I believe there is a good chance to borrw $2.23B using $7.399B asset as collateral.

3. Yes, general consensus is that there will be no higher bidder.

I used the simple calculation:
Expected Value = probability of deal * gain - probability of no deal * loss
Annualized return = expected value * 12 / month it takes to complete

Of course everybody have different estimates, we can plug in our estimates and decide for ourselves if this is a acceptable investment/bet. My estimates might be too optimistic, a safer way to do this is to wait till Friday's earning report comes out. Then we can have a clearer picture of Blackberry's Balance sheet.  

How low can Blackberry go if the deal doesn't go through? This downside risk is lessened by Friday's big price drop. My estimate for worst case scenario is cash (2.5 B) + patent(3.3 B) /3 = $3.6B or roughly $6.89 per share. I believe I will be able to get out above $6.89 per share if deal doesn't go through. That gives us a max loss of $1.71 per share.
With this new loss, expected return changes to 2.2% or 6.59% annualized.

jamesmith

Buffett's wrote on 1988 a list of questions to answer for arbitrage situation.

To evaluate arbitrage situations you must answer four questions:
(1) How likely is it that the promised event will indeed occur?
(2) How long will your money be tied up?
(3) What chance is there that something still better will transpire-a competing takeover bid, for example? and
(4) What will happen if the event does not take place because of anti-trust action, financing glitches, etc.?

bigbadwolf

MAKO is agreed to be bought by SYK today.

jamesmith

bigbadwolf 发表于 2013-9-25 08:09 AM
MAKO is agreed to be bought by SYK today.

Market think the deal will go through, MAKO's current price is 29.54, deal price is 30. gap is 1.69%, How long do you think it will take for the deal to complete?

jamesmith

The good thing about writing my decision making procedure down is that I can't lie to myself. It's useful for me to review why I did what I did.

I should be more patient and not jump for the 10 to 11% annualized gain. Current price drop of BBRY just increase the gap significantly, thus much higher profit if the deal went through. After reading many of the media and online discussion on this situation, I still believe the market action is caused by fear rather than logic. BBRY's quarterly report comes out tomorrow morning. I might consider adding to the position if the report is what I expected.

chinesebuffet

买它不是investing， 而是赌收购了， 这已经违反了小P你的投资原则了。 ?在苹果三星等的夹改下， 黑霉还有谁要呢？

jamesmith

[quote]chinesebuffet 发表于 2013-9-27 08:45 AM

这个workout 就是赌收购的 risk arbitrage. Will only use small % of portfolio to do workout like this.
市场觉得收购不会成，prem watsa 在 bluffing, 价格已经距离收购价  > 11%
我认为prem watsa 不是 bluffing,最大的变数就是用黑莓的资产借债筹钱, 他没有公开收购联盟里面还有谁

jamesmith

The buyout story is over, I was wrong, Fairfax wasn't able to get financing for the deal. Instead, the group purchased 7 year, $1 billion convertible debentures with a $10 conversion price and 6% interest.
Usually when I was wrong I should just get out, but current price is too cheap, it gives Blackberry an EV of $1.65B. I am evaluating it further before I make any move. Current price of $6.49 is down 24.5% from where I bought it.

http://press.blackberry.com/fina ... -from-fairfax-.html

"Under the terms of the transaction, the Purchasers will subscribe for U.S. $1 billion aggregate principal amount of 6% unsecured subordinated convertible debentures (the “Debentures”) convertible into common shares of BlackBerry at a price of U.S. $10.00 per common share (the “Transaction”), a 28.7% premium to the closing price of BlackBerry common shares on November 1, 2013.  The Debentures have a term of seven years.  Based on the number of common shares currently outstanding, if all of the U.S. $1 billion of Debentures were converted, the common shares issued upon conversion would represent approximately 16% of the common shares outstanding after giving effect to the conversion."

jamesmith

jamesmith 发表于 2013-11-5 08:25 AM
The buyout story is over, I was wrong, Fairfax wasn't able to get financing for the deal. Instead, t ...

I didn't think of this at the purchase, what if Fairfax succeed in bringing BBRY private at $9? Since Fairfax is only committing its 10% stake. That means the buyout have to be financed with substantial amount of loan, using BBRY's asset as collateral. Interest payment will increase the burden to the already seem impossible turnaround for BBRY. And it is still a question how much cash BBRY will burn in next quarter. Buying out BBRY as a whole won't work unless the buyer has substantial amount of cash, it is not the case for Fairfax.

Yes bbry is undervalued at current price, and it is worth more dead than alive. Splitting BBRY apart and selling them will generate more money than market cap of BBRY, but no management will fire themselves. My initiall thesis is to arbitrage the buyout, not betting on BBRY turnaround, so I will be getting out