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Watsa surprises again by riding to BlackBerry's rescue

The BlackBerry campus in Waterloo, Ont., Sept. 23, 2013. If making a big bet on the beleaguered mobile device company just a few days after mass layoffs and write-downs were forecast seems like a stomach-churning risk, it’s nothing Prem Watsa, the so-called Warren Buffett of the North, hasn’t faced before.

MARK BLINCH/REUTERS

He is one of Canada's most celebrated investors, a man who cemented his reputation for turning disaster into profit when he made $2-billion on a series of clever bets in the financial crisis.

On Monday, Prem Watsa became something else: the potential saviour of BlackBerry Ltd.

The once-dominant smartphone maker, based in Waterloo, Ont., has been abandoned in droves by customers and scorned by investors. Its newest phones are selling so poorly that late last week the company said it would report a second-quarter loss of nearly $1-billion (U.S.) and would cut 4,500 jobs, or 40 per cent of its work force, in an attempt to stem the losses.

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BlackBerry hired investment bankers and legal advisers in the summer and put itself up for sale.

The auction appeared to have yielded little interest in the floundering company, until Mr. Watsa's investment company, Fairfax Financial Holdings Ltd., emerged with a preliminary $4.7-billion offer for the company.

"We're trying to make sure it remains in whole, in Canada," Mr. Watsa said in an interview Monday after unveiling the proposed deal.

But there is more than patriotism at play. Mr. Watsa gained his standing as one of Bay Street's sharpest minds with savvy investments over a long period of time. From 1985 through 2012, Fairfax earned annual returns of 19 per cent for its shareholders. Mr. Watsa rarely makes a move unless he believes the numbers add up.

BlackBerry's financial numbers have been abysmal, and are getting worse. So what does Mr. Watsa see that others don't?

Part of the answer lies in the company's balance sheet. Though millions of people have switched from BlackBerrys to Apple's iPhones or other devices, the Waterloo company is still in excellent financial shape because of the era when it was the global leader in high-tech keyboard phones. (At its peak, BlackBerry took in $20-billion in annual sales.)

Today, BlackBerry is debt-free and has $2.6-billion in cash and short-term investments. That alone would pay for a large portion of Mr. Watsa's takeover bid.

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It also has a collection of highly valuable patents – some of which it acquired from Nortel Networks Corp. when that company was broken up and sold for parts after it filed for bankruptcy protection in 2009. BlackBerry paid $770-million for the Nortel patents in 2011, when BlackBerry was still known as Research In Motion Ltd. They are likely more valuable today.

But Mr. Watsa is also hoping that by taking the company off the stock market, he will be able to give BlackBerry CEO Thorsten Heins and his executives the breathing room they need to make long-term strategic decisions.

"BlackBerry has fallen on hard times recently, but we have every confidence it will be successful again," Mr. Watsa said. His strategy includes focusing on the corporate market, where it has had more success retaining customers, rather than on the consumer market – a path BlackBerry said last week it is going to take.

Mr. Watsa has led a consortium of investors to purchase a deeply troubled company before. In 2011, Fairfax teamed up with investors such as Boston-based Fidelity Investments to take a 35-per-cent stake worth $1.5-billion in the teetering Bank of Ireland. It's the kind of bid that caused another person in the investment industry to describe him as a guy that thinks far outside the box.

Mr. Watsa was, and still is, bearish on Europe, but his firm determined that Ireland's oldest bank was a careful lender with good long-term prospects. It's a move he considers a success, as Irish government bond rates have fallen and capital has begun to flow back into the country.

But Fairfax hasn't been immune to mistakes. It invested heavily in two companies in the past decade that later went into bankruptcy protection. It took a loss on an investment in CanWest Global Communications Corp. when the company filed for bankruptcy protection and was later folded into Shaw. And an investment in the debt of paper company AbitibiBowater Inc. also resulted in losses. Both prompted Mr. Watsa to say he'd "underestimated the impact of what the economy could do to these businesses."

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Mr. Watsa is also not the type to give up easily. In 2006, Fairfax became embroiled in a legal battle with a group of hedge funds that it alleged were a part of a big conspiracy to put the company out of business. One of the defendants was billionaire investor Steve Cohen of SAC Capital Advisors LP. Seven years later, the legal battle continues and allegations have not been proven in court, but Fairfax received a boost in July when a grand jury announced criminal charges against SAC Capital, saying it engaged in "substantial" and "pervasive" insider trading. Such a charge could strengthen the Fairfax appeal.

Mr. Watsa's patience is again on display with BlackBerry. Two years ago, Fairfax owned just 2.3 per cent of the former Research In Motion's shares. But over time, the investment firm has upped its stake in the company to current holdings of 10 per cent. Mr. Watsa had an inside look at the company as a board member from January, 2012 until he gave up his seat in mid-August to sidestep any criticism that his large stake created a conflict of interest.

In the meantime, Fairfax has surely been crunching the numbers – reviewing the value of patents, cash on the books, severance payments and the value of the BlackBerry Messenger system.

Mr. Watsa counts former BlackBerry CEO and co-founder Mike Lazaridis as a friend, and has strong ties to the University of Waterloo, where BlackBerry's headquarters are located. "As chair of our Finance and Investment Committee, he has been a valuable source of advice and support for the university," said Feridun Hamdullahpur, president of the University of Waterloo, where Mr. Watsa has served as chancellor since mid-2009. "His unassuming exterior belies a tremendous amount of experience and very shrewd judgment."

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About the Author
Financial Services Reporter

Jacqueline Nelson is a financial services reporter at the Report on Business. Prior to that she was a staff writer at Canadian Business magazine, covering news and writing features on a wide variety of subjects. More

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