On Bay Street, Watsa’s ‘brilliant’ reputation intact despite failed takeover deal

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Prem Watsa promised a private buyout that would hide BlackBerry Ltd. from the public spotlight, allowing the troubled company to restructure behind the scenes. What he delivered was something dramatically different.

Despite personal assurances that his company, Fairfax Financial Holdings Ltd., had more potential partners than it needed and guaranteeing that his bid was a "definite offer," Mr. Watsa scrapped the takeover in favour of a simple debt financing. The funding will backstop BlackBerry's balance sheet as the smartphone maker churns through its cash.

BlackBerry shareholders, already skeptical that a deal could get done, expressed their frustration by sending the company's shares plummeting 17 per cent. Although the smartphone maker will no longer be saddled with as much debt, shareholders won't get the $9 per share offered in the buyout.

Bay Street took a much different view. Regardless of what Mr. Watsa originally promised, and no matter what happens to the Canadian tech darling, seasoned veterans are not holding anything against the Fairfax chief. "He is a brilliant investor," said Royal Bank of Canada chief executive officer Gord Nixon. "There's no question about it."

The overwhelming narrative in financial circles is that Mr. Watsa has made a slew of correct investments, including his major bet against U.S. housing leading up to the Great Recession.

"I don't think his reputation is on the line," said CIBC World Markets analyst Paul Holden, who covers Fairfax. According to his calculations, Fairfax's position in BlackBerry comprised just 5 per cent of its total portfolio before the tech stock tanked Monday. Fairfax's shares also took a hit, falling 2.5 per cent.

However, Mr. Holden said there are whispers that BlackBerry is "taking up an undue amount of [Mr. Watsa's] time relative to the size of the investment," creating an overarching question: "Would his time be better used elsewhere at Fairfax?" The value investor sat on BlackBerry's board, and has spent a big share of his time focused on the turnaround – taking away from his efforts to look at other investment opportunities. Southeastern Asset Management and Fidelity Investments, Fairfax's two largest shareholders, declined to comment for this story.

Experienced investors understand that while BlackBerry was a high profile bet, and that it was highly unusual for Mr. Watsa to come of the shadows where he typically finds comfort to champion the company, they argue that the public can't hold his propensity for big calls against him.

"Being a smart investor involves taking risks," said Erol Uzumeri, co-founder of Searchlight Capital Partners and former head of private equity for the Ontario Teachers' Pension Plan. "You don't make profits without taking some element of risk." Mr. Uzumeri added that should BlackBerry continue to flounder, he wouldn't hold it against Mr. Watsa "frankly one bit."

BlackBerry isn't the first company Fairfax has run into trouble with. Mr. Watsa made the wrong calls on the turnarounds of Abitbi-Bowater and CanWest. Fairfax recovered from both, one of the reasons Bank of Montreal has continued to support Mr. Watsa.

While the bank declined to comment Monday, it has a long-standing relationship with Fairfax, serving as the company's lead underwriter for debt offerings and advising it on takeovers. Bank of Montreal is also serving as lead underwriter for the new $1-billion debt financing that Mr. Watsa announced Monday.