The Deal: Selling BlackBerry Will Be Just As Hard As Selling BlackBerrys

NEW YORK (The Deal) As Prem Watsa's Fairfax Financial Holdings  reportedly tries to line up support to take BlackBerry (BBRY) private, industry watchers are questioning whether anything about the once-dominant mobile device maker is worth saving. 

Media reports suggest that Fairfax, which has a 9.89% stake in the Waterloo, Ontario-based company, is talking to the Canada Pension Plan Investment Board about a bid. 

But while Silver Lake Partners and Michael Dell might have a plan for Dell (DELL), it's hard to see what Fairfax will do, other than keep a Canadian company, with its 10,000-plus jobs, in business and in Commonwealth hands. 

When BlackBerry said on Aug. 12 that it had hired JPMorgan Chase  (JPM) and law firms Skadden, Arps, Slate, Meagher & Flom and Torys for help in reviewing alternatives, it also said that Watsa was stepping down from the board because of "potential conflicts." 

Fairfax and BlackBerry have been talking since then, according to a person familiar with the situation. A BlackBerry spokeswoman refused to confirm that, saying the company didn't comment on speculation. Fairfax didn't return calls seeking comment. 

Industry experts say that, as of now, BlackBerry's board is focusing on a sale of the entire company. Specifically, these people say, BlackBerry has not tried to separately peddle its approximately 5,000 patents. But that could change if no other workable option emerges. 

In fact, one industry source said that bankers had tried to determine what the company's IP might be worth to strategic acquirers and/or patent holding firms. 

The most obvious indicator of BlackBerry's decline is its share of the smartphone market, or rather lack of share, and one that is still on a steady slope downward. As of July, Google's (GOOG) Android operating system led off with a solid 51.1%, Apple's (AAPL) iOS captured 43.4%, with Microsoft  (MSFT) pulling a distant third at 3.5% and BlackBerry barely nudging the needle at 1.2%, according to data released in September by Kantar Worldpanel ComTech. 

Or, as one observer succinctly put it, BlackBerry's business is "falling off a cliff." 

The results of the decline are well-documented. Two years ago, the company's shares were trading at about $30. Their recent 60-day moving average sits at around $11.50 per share. At the beginning of 2012, co-founders Mike Lazaridis and Jim Balsillie were pushed out of the company. 

BlackBerry's board arguably compounded the problems by sticking with its independent status and promotinig head of products development Thorsten Heins to the top slot rather than seek an outsider. The new chief presided over the release of the BlackBerry 10 to thunderous indifference. 

As Jefferies  analyst Peter Misek wrote in an Aug. 19 research note, "We have been highlighting that developed market smartphone markets are saturated leading to decelerating shipments and pricing pressure...We had thought that BBRY's small BB10 shipment amount (<10% of APPL's) would allow it to buck this trend, but it failed to do so. Overall, we continue to believe there is excess inventory of high-end smartphones and weak demand." 

Misek had a $15 target on the stock at the time. 

So even if Fairfax has a tough task in convincing backers that BlackBerry can recover, the sales pitch will be even tougher because all those patents actually may not be worth much. The problem is that the time to get top dollar has likely come and gone. 

Kevin Rivette, founder of patent advisory firm 3LP Advisors, said the big issue for BlackBerry is how much of its patents were cross-licensed to industry rivals, thereby reducing their value to those same companies.

That cross-licensing ramped up after BlackBerry paid almost $613 million in 2006 to settle an infringement lawsuit brought by patent holding company NTP Inc., he said.

And the crest of big deals for patent portfolios has also washed by, Rivette said. 

There was Canada's Nortel Networks, which, in its liquidation process in 2011 sold some 6,000 patents to Rockstar Bidco, an entity composed of practically every single big tech company and then some: Microsoft, Apple, Sony (SNE), EMC  (EMC) and Ericsson (ERIC). BlackBerry, at that time known by its original name, Research in Motion, also participated. 

So there is the simple fact that, as one industry source said, all the relevant companies are "already armed with patents." 

And to make matters worse, the $4.5 billion Rockstar deal hasn't exactly rocked. The consortium is quietly trying to shop the patents, according to several people familiar with the situation, because the expected monetization isn't working out as planned. In addition, it now appears that the group overpaid, not taking into account issues like cross-licensing agreements, out of fear that Google might win the auction. 

Of course, what Google did was turn around and pay $12.5 billion for 17,000 patents from Motorola Mobility Holdings.

Since the Nortel and Motorola sales, InterDigital  (IDCC) tried to shop its 20,000 patent portfolio, seeking a similarly lofty valuation. But it failed to find a buyer and pulled that auction in January 2012. Later, InterDigital settled on a sale of a fraction of the portfolio, 1,700 patents, to Intel Corp. for $375 million in September 2012. 

And when Eastman Kodak Co. was facing oblivion, it tried to shop its patents, looking for a price of more than $2 billion. Ultimately those patents sold in December 2012 during the company's liquidation for $525 million to a huge consortium of tech players. 

And in one more big deal, AOL  (AOL) sold 800 patents for $1.1 billion to Microsoft in April 2012. But Microsoft's subsequent sale of the assets further demonstrates the softness of the market: Facebook  (FB) bought the lot for $550 million.

Pacific Crest Securities' James Faucette said in a Tuesday, Sept. 10, research note that BlackBerry stock is likely close to the value at which Fairfax bought its shares. With his calculations putting the company's tangible book value/share at $11.23, that would mean a market cap of about $5.9 billion, far below media estimates of $10 billion for the patent portfolio alone. 

Faucette, in an earlier note after the strategic review announced, pinned a more realistic purchase price with private equity backing at between $8 and $10 per share, so about $5 billion at the high end. That sinks to $6 per share if Fairfax can't get private equity to go along for the ride. 

And the analyst also pointed out that despite the fact that BlackBerry has $2.8 billion in cash on its books, it also disclosed in a Securities and Exchange Commission filing at the end of June that it had $5.3 billion in off-balance sheet purchase obligations, money that would mostly have to be paid if there is something other than a liquidation scenario in the works.

But there is one strategic acquirer reportedly talking to BlackBerry about a possible bid: China's Lenovo Group

While Lenovo is primarily a PC maker, it is also stepping into the smartphone business, especially in emerging markets on the lower end of the price scale. 

That marriage makes some sense, one industry source said.

A Lenovo spokesman said the company doesn't comment on speculation.

The man chosen to lead BlackBerry's special committee does seem well positioned for the task, whichever bidders come knocking. Timothy Dattels is a partner at TPG Capital LP, focusing on Asian investing. Before he joined the PE firm, he was with Goldman Sachs  (GS), heading up banking for Asia ex-Japan. 

Bonus points: Dattels is a native Canadian.

Written by Paula Schaap.