BlackBerry gives Canada's 'Warren Buffett' the chance of fruit

BlackBerry gives Canada's 'Buffett' the chance of fruit Hopeful signs in part of business as billionaire investor tries to secure financing for $4.7 billion offer By Christopher Williams As a mobile phone maker, BlackBerry is already finished.

Nobody in the business has ever recovered from a fall in market share comparable to the one suffered by the Canadian company.

Other leaders of the past have sought sanctuary in the arms of bigger technology firms. Motorola is a plaything and patent warehouse for Google, Nokia's mobile phone business faces an uncertain future spearheading yet another attempt by Microsoft to attain relevance in the smartphone era, and HP gave up on Palm within 18 months of acquiring it.

BlackBerry, meanwhile, in its perilous state, failed to find an industry buyer interested in attempting to turn around its handset business. Instead, the company is heading into private equity hands.

It intends to accept a $4.7 billion (pounds 2.9 billion) offer from a consortium led by Fairfax Financial, a Canadian firm fronted by Prem Watsa, a billionaire investor known as the country's own Warren Buffett. At first sight, the price might seem high for a smartphone brand that no longer has any hope of challenging Apple or Google.

On closer inspection, however, the deal appears less crazy. For starters, BlackBerry has $2.6 billion in cash and zero debt on its books. That means Mr Watsa is offering $2.1 billion for the company's other assets, the value of which is more complicated to assess.

Like other industry pioneers, including Nokia and Motorola, BlackBerry has a significant patent portfolio. Appraising smartphone intellectual property is notoriously difficult, as Google discovered when it massively overpaid for Motorola's patents in its $12.5 billion acquisition in 2011.

At that time the smartphone industry's patent wars were at their most ferocious, with rivals suing each other. Two years later, the environment is less febrile, more cross-licensing agreements have been struck and the value of patents as part of a mutually assured destruction courtroom strategy has dwindled.

The most useful patents, needed to build a good smartphone, still attract substantial royalty payments from rivals, though. Several analysts have tried to value BlackBerry's portfolio and offer wildly varying figures. At the lower end, Macquarie has it pegged at $1.6 billion.

If Mr Watsa believed that figure, it would mean he is willing to pay $500m for the operating business. Last Friday, BlackBerry issued a profits warning that sent its share price tumbling.

The failure of its new smartphone software, BB10, and the handsets released alongside it earlier this year will mean an operating loss of $1 billion. Revenues will be $1.6 billion, down 45pc on the same period last year. It sounds grim and it is for the 4,500 employees BlackBerry will make redundant.

Yet the operating loss is entirely attributable to the failure of the devices business, which accounts for roughly half of revenues, so there remains an $800m business that at least pays its way.

That is BlackBerry's enterprise services offering, which sells the company's email server and mobile device management software to corporate and government IT departments.

They have been adapted in recent years to handle iPhones and Android devices. BlackBerry even noted in its profit warning that its email software had been installed on 30pc more servers in the past three months.

If Fairfax Financial can shut the handset business at reasonable cost, it could end up controlling good enterprise software assets at a knockdown price, with plenty of cash to invest.

Meanwhile, the patents can be sold on or licensed to former rivals with no need for reciprocal payments to build BlackBerry handsets. There are caveats to this optimistic scenario.

Unusually, and most riskily, Mr Watsa's consortium had not completed financing when the bid was announced.

Stealthier private equity rivals also have six weeks to beat it. Mr Watsa, living up to the Warren Buffett comparisons, has built a canny fail-safe into his bid. If he fails to raise financing, Fairfax faces no penalty, but if a better offer emerges, BlackBerry will have to pay it $150m to back out.