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Fairfax seeks $1-billion from investors for BlackBerry deal

Fairfax Financial Holdings Ltd. chairman and chief executive officer Prem Watsa speaks during the company's annual meeting in Toronto.

AARON HARRIS/REUTERS

Fairfax Financial Holdings Ltd. is seeking over $1-billion (U.S.) of equity investments from institutional investors to back its preliminary $4.7-billion plan to acquire BlackBerry Ltd.

According to people familiar with the discussions, Fairfax's chief Prem Watsa has personally contacted several leading Canadian and U.S. pension and private equity funds to win support for a highly conditional overture to acquire the troubled smartphone maker. These sources said that as of Tuesday, only one pension fund, the Ontario Teachers' Pension Plan, is seriously considering joining the potential takeover consortium.

A spokeswoman for Teachers declined to comment.

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Mr. Watsa is pitching the potential acquisition as a leveraged buyout that would be financed with more than $3-billion of bank loans, $1-billion of equity from institutions and Fairfax's nearly 10-per-cent stake in BlackBerry, which is currently valued at about $470-million.

If Fairfax falls short of the equity it's seeking to help finance the potential takeover, people familiar with its plans said it intends to arrange a short-term bridge loan that could be repaid with BlackBerry's cash holdings of about $2.6-billion.

Fairfax has been quietly courting BlackBerry for months, but according to sources, the company's directors had little interest in its highly leveraged plan until Friday when its announcement of a nearly $1-billion writedown erased nearly 20 per cent of the company's stock market value in the final hour of trading.

Fear of further stock price declines prompted the board to enter discussions late Friday with Fairfax, which after months of talks with a variety of potential buyers, was the only suitor still expressing interest in the company. Sources familiar with the discussions said the two companies negotiated through the weekend and talks almost broke off when Fairfax refused to back away from its demand for the lucrative $150-million break fee it secured.

"This was an agonizing decision for the board," said one person familiar with the negotiations.

Takeover suitors typically demand that target companies pay them a so-called break fee if their bid is rejected in favour of a richer competing offer. The fees are designed to compensate suitors for their expenses during acquisition negotiations.

What is highly unusual about BlackBerry's commitment to pay a break fee is that Fairfax has submitted an offer that is so tentative that it represents little more than an expression of interest.

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Under the terms of Fairfax's proposal, it can walk away from its acquisition plan if it becomes dissatisfied after assessing the company's confidential financial and operating data. Typically, takeover offers are not made until after suitors complete so-called due diligence studies of target companies.

BlackBerry's board ultimately approved Fairfax's proposal, sources said, because it represented the only immediate defence against further stock price plunges. It has also given the company until Fairfax's deal deadline of early November to attempt to attract another potential buyer.

In trading on the Toronto Stock Exchange, Blackberry's stock retreated 30 cents to $8.78 (Canadian). On Nasdaq, shares closes at $8.53 (U.S.), below Fairfax's proposed offer price of $9 a share.

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