Fitch: BlackBerry Bid by Fairfax Expected to Be Reasonably Managed, But Risks Remain

Wed Sep 25, 2013 11:19am EDT

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(The following statement was released by the rating agency) CHICAGO, September 25 (Fitch) Fitch Ratings commented that while Fairfax Financial Holdings Ltd.'s (Fairfax) consortium bid for BlackBerry Ltd. could have potential negative credit implications, based on the company's past track record Fitch expects that any potential purchase of BlackBerry would most likely be done within current rating expectations. Fitch notes that the potential deal for BlackBerry remains fluid, as the current offer is in the form of a letter of intent and not a definitive agreement. Under the proposed offer, Fairfax would contribute its current 10% ownership of BlackBerry to the transaction. Fitch could take negative rating actions should Fairfax decide to increase its ownership in BlackBerry in a manner that would significantly increase financial leverage, decrease holding company cash or deplete insurance subsidiary capital. Fitch would also view negatively any acquisition, even if reasonably financed, that resulted in a concentrated investment of Fairfax's capital. The value of the current offer is $4.7 billion for all of BlackBerry, which is very large compared to Fairfax's reported total assets of $36.1 billion and shareholders' equity of $8.6 billion as of June 30, 2013. Fitch recognizes that BlackBerry's business model is under intense pressure, and that the new strategy to move away from consumer products may not prove successful. This uncertainty influences Fitch's tolerance in its ratings for deviations in leverage, or any concentration risks. Fitch's ratings expect that Fairfax's financial leverage ratio will be maintained at no higher than 35% (33% actual as of June 30, 2013), with operating earnings plus holding company cash-based interest and preferred dividend coverage no less than 4x (6.3x through the first six months of 2013). Fitch also anticipates that the company will continue to maintain a sizable amount of holding company cash and investments ($1.1 billion at June 30, 2013). Fairfax still has the option to exit the deal as it is subject to a due diligence review; Fairfax is expected to complete due diligence by Nov. 4, 2013. It is also open to other bidders to make competing offers for BlackBerry. Fairfax paid an average of $17 per share for its current 10% ownership of BlackBerry, resulting in a current unrealized loss given the current offer is $9 per share. Uncertainty also surrounds the make-up of the consortium, but Fairfax's CEO Prem Watsa said in an interview with the Wall Street Journal that Canadian pension funds would likely be involved. This could include Canadian Pension Plan Investment Board and Ontario Teachers' Pension Plan. Fairfax has a history of making friendly acquisitions, often in Canadian companies, which have included several insurance companies. Contact: Brian C. Schneider, CPA, CPCU, ARe Senior Director +1-312-606-2321 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Dafina M. Dunmore, CFA Director +1-312-368-3136 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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