Fairfax CEO Prem Watsa sees similarities between a 2011 deal with the Bank of Ireland and BlackBerry’s current situation.Charla Jones/The Globe and Mail
When the outlook for Bank of Ireland looked grim in the spring of 2011, a Canadian white knight, who's making headlines again these days, rode in to save the lender from state control.
Ireland's real estate market had imploded about three years earlier, sending the country's banking sector into a tailspin. Prices of homes and commercial property had fallen by half from their peak. The government was restructuring the banking sector to stave off collapse, and bailouts strained public coffers.
A shareholder pelted the Bank of Ireland's top brass with eggs at the company's annual meeting in June, 2011. The bank's shares, which traded near €12 in early 2007, were closer to 11 euro-cents by early July. The Irish government already owned more than one-third of the bank and it looked like it was going to have to take control.
CEO Richie Boucher, prodded by the government, worked to keep the bank from becoming a ward of the state. On July 17, in a piece headlined "Poor old Richie," the Sunday Times said "the chances of the bank raising €1.9-billion in new equity, and staying out of state control, range from slim to impossible."
Within 10 days of that report, Fairfax Financial Corp., with a consortium of investors, agreed to inject about €1.1-billion ($1.5-billion Canadian at the time) into the lender, Ireland's oldest bank. The 35-per-cent stake that they bought helped Bank of Ireland emerge as the country's only lender to avoid nationalization. The deal was done for ten cents per share, and the stock has since more than doubled.
Mr. Watsa brings up the Bank of Ireland scenario to explain why he sees value in BlackBerry, and why he has no doubt that Fairfax will be able to pull off its preliminary $9-per-share bid for the troubled Waterloo, Ont.-based company.
While there are few similarities between a bank established by Royal Charter in the eighteenth century and an IT firm born in the 1980s, both had important roles in the economies of their respective countries and both were buffeted by industry upheavals that only the most prescient investors saw coming. Mr. Watsa, more than most other financiers, is willing to look at the bigger picture.
"I'm not underestimating their short-term problems," he said in an interview. "I'm just saying to you that these things happen all the time. Richie Boucher told me that no one would lend the country of Ireland any money – forget the Bank of Ireland."
Mr. Watsa, who keeps an analyst report in his office from the late 1990s that predicts that Apple could go bankrupt, is not gambling on returning BlackBerry to its glory days. He's gambling on it being in a better position in the future than it is now.
"It's a good company, it's a good product. Otherwise nothing could help it," he says. "Can it compete in the consumer market with Apple and Samsung and the Android? No, we think that's very tough. But in the enterprise market they've got huge advantages."
Fairfax and its unnamed potential equity partners have been given six weeks for due diligence on BlackBerry, and Mr. Watsa says a final offer will be presented by Nov. 4.
It was during a Berkshire Hathaway shareholder meeting in 2010 that Mr. Watsa, dubbed "Canada's Warren Buffet," met the person who would put Bank of Ireland on Mr. Watsa's radar: Bill McMorrow, founder of Beverly Hills-based real estate firm Kennedy Wilson. In 2011, as the Irish bank foundered, Mr. McMorrow was negotiating to buy some real estate loans from the lender. He let Mr. Watsa know that he was impressed with Mr. Boucher, which prompted Mr. Watsa to follow up.
"We had a very, very tight timeframe to work with the government to get a deal," Mr. Boucher recalls.
"I had a long conversation with Prem, talked about the company and what we were trying to do," he says. "He said he'd like to think about it. We had another conference call for about four hours on the Saturday, and he rang me back in the afternoon and said that himself and his colleagues were coming over on Sunday...
"We could see very quickly, because we'd been talking to a number of people, that they were very experienced at doing due diligence," Mr. Boucher says. "They pulled in resources from other people they knew to do specialized due diligence."
"[Prem Watsa] said at the time, and to be honest I didn't believe him, he said he could bring in some very heavyweight investors if the idea was good enough," says Denis Donovan, a senior executive at Bank of Ireland. "And he was absolutely right."
U.S. private equity funds and others had been looking at the bank, but most wanted the Irish government to backstop any potential investment to reduce their risk.
Mr. Watsa had Canadian Western Bank help with the due diligence, and over a period of about two weeks a team of people combed through the bank's loan books and questioned its credit officers. The team came away believing that the bank, which had modeled its property portfolio based on Nevada's property meltdown, had taken larger writedowns than even a worst-case scenario would have warranted.
Billionaire investor Wilbur Ross, known for turning around troubled companies, had already been active in the Irish banking sector, and Fairfax reached out to him. Together, the two groups sought out Fidelity Investments and the Capital Group, and the investment was made.
"Can you imagine that at 10 cents no one wanted it?" Mr. Watsa says. "Everyone who had put money into the Bank of Ireland until that time had lost money."
"The market's very emotional," he adds. "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."
Mr. Watsa claims BlackBerry's customers are jittery because its fate is uncertain, but will feel more confident and start buying more once the deal is done.
"What we're doing here is simply doing our due diligence to figure out what's needed to finance it over the long term, and then raising the money to have a capital structure that will help the company over the long term," Mr. Watsa says, adding that the company won't have too much debt.
"We want BlackBerry to survive for a long time," he says. "Which means that it needs to have a very sound capital structure, and we're going to focus on making sure that that takes place."