Fitch Firm on BlackBerry (BBRY) as Fairfax Deal Unfolds
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Fitch Ratings commented that while Fairfax Financial Holdings Ltd.'s (Fairfax) consortium bid for BlackBerry Ltd. (Nasdaq: BBRY) could have potential negative credit implications, based on the company's past track record Fitch expects that any potential purchase of BlackBerry would most likely be done within current rating expectations.
Fitch notes that the potential deal for BlackBerry remains fluid, as the current offer is in the form of a letter of intent and not a definitive agreement. Under the proposed offer, Fairfax would contribute its current 10% ownership of BlackBerry to the transaction.
Fitch could take negative rating actions should Fairfax decide to increase its ownership in BlackBerry in a manner that would significantly increase financial leverage, decrease holding company cash or deplete insurance subsidiary capital. Fitch would also view negatively any acquisition, even if reasonably financed, that resulted in a concentrated investment of Fairfax's capital. The value of the current offer is $4.7 billion for all of BlackBerry, which is very large compared to Fairfax's reported total assets of $36.1 billion and shareholders' equity of $8.6 billion as of June 30, 2013.
Fitch recognizes that BlackBerry's business model is under intense pressure, and that the new strategy to move away from consumer products may not prove successful. This uncertainty influences Fitch's tolerance in its ratings for deviations in leverage, or any concentration risks.
Fitch's ratings expect that Fairfax's financial leverage ratio will be maintained at no higher than 35% (33% actual as of June 30, 2013), with operating earnings plus holding company cash-based interest and preferred dividend coverage no less than 4x (6.3x through the first six months of 2013). Fitch also anticipates that the company will continue to maintain a sizable amount of holding company cash and investments ($1.1 billion at June 30, 2013).
Fairfax still has the option to exit the deal as it is subject to a due diligence review; Fairfax is expected to complete due diligence by Nov. 4, 2013. It is also open to other bidders to make competing offers for BlackBerry. Fairfax paid an average of $17 per share for its current 10% ownership of BlackBerry, resulting in a current unrealized loss given the current offer is $9 per share.
Uncertainty also surrounds the make-up of the consortium, but Fairfax's CEO Prem Watsa said in an interview with the Wall Street Journal that Canadian pension funds would likely be involved. This could include Canadian Pension Plan Investment Board and Ontario Teachers' Pension Plan. Fairfax has a history of making friendly acquisitions, often in Canadian companies, which have included several insurance companies.
Fitch notes that the potential deal for BlackBerry remains fluid, as the current offer is in the form of a letter of intent and not a definitive agreement. Under the proposed offer, Fairfax would contribute its current 10% ownership of BlackBerry to the transaction.
Fitch could take negative rating actions should Fairfax decide to increase its ownership in BlackBerry in a manner that would significantly increase financial leverage, decrease holding company cash or deplete insurance subsidiary capital. Fitch would also view negatively any acquisition, even if reasonably financed, that resulted in a concentrated investment of Fairfax's capital. The value of the current offer is $4.7 billion for all of BlackBerry, which is very large compared to Fairfax's reported total assets of $36.1 billion and shareholders' equity of $8.6 billion as of June 30, 2013.
Fitch recognizes that BlackBerry's business model is under intense pressure, and that the new strategy to move away from consumer products may not prove successful. This uncertainty influences Fitch's tolerance in its ratings for deviations in leverage, or any concentration risks.
Fitch's ratings expect that Fairfax's financial leverage ratio will be maintained at no higher than 35% (33% actual as of June 30, 2013), with operating earnings plus holding company cash-based interest and preferred dividend coverage no less than 4x (6.3x through the first six months of 2013). Fitch also anticipates that the company will continue to maintain a sizable amount of holding company cash and investments ($1.1 billion at June 30, 2013).
Fairfax still has the option to exit the deal as it is subject to a due diligence review; Fairfax is expected to complete due diligence by Nov. 4, 2013. It is also open to other bidders to make competing offers for BlackBerry. Fairfax paid an average of $17 per share for its current 10% ownership of BlackBerry, resulting in a current unrealized loss given the current offer is $9 per share.
Uncertainty also surrounds the make-up of the consortium, but Fairfax's CEO Prem Watsa said in an interview with the Wall Street Journal that Canadian pension funds would likely be involved. This could include Canadian Pension Plan Investment Board and Ontario Teachers' Pension Plan. Fairfax has a history of making friendly acquisitions, often in Canadian companies, which have included several insurance companies.
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