Qatar Holding's USD 100 million investment in embattled smartphone maker BlackBerry is a bold bet that is high-risk, but may also turn out to be high-reward.
Canadian company BlackBerry was once the darling of Wall Street bankers and financial executives around the world, who swore by its corporate email system, BlackBerry messenger and other applications that were way ahead of their time -until Apple showed up with its iPhone.
Together with Google's Android phones, Apple beat BlackBerry (once known as Research in Motion) at its own game.
After being in denial for years about its eroding market share and flirting with tablet phones, BlackBerry eventually let go of its key executives Jim Balsillie and Mike Lazaridis, and the company's board selected the dour Thorsten Heins to lead the dynamic company.
After repeated efforts to re-energize the company, things came to a head in September when Prem Watsa, the mercurial chairman of Fairfax Financial Holding, offered to buy the company for USD 4.73 billion. Fairfax was already the largest shareholder in the company with a 10% stake.
But Fairfax struggled to finance the acquisition. On the eve of the deadline to buy BlackBerry, Fairfax abandoned the idea, orchestrated the sacking of Heins and sought USD 1 billion in debt from institutional investors that included Qatar Holdings, a subsidiary of sovereign wealth fund Qatar Investment Authority.
Watsa is often dubbed as the Warren Buffett of Canada for his contrarian, long-term bets, and institutional investors seem to have bought into his credibility as much as that of BlackBerry's assets.
Fairfax has poured USD 250 million, while Mackenzie Financial Corporation invested USD 200 million, Canso Investment Counsel Ltd. USD 300 million, Makel Corporation USD 100 million, Qatar Holding LLC USD 100 million and Brookfield Asset Management Inc. USD 50 million.
The debentures will have a coupon of 6% and will be convertible into shares at USD 10 per share. The debentures have a term of seven years. Assuming all USD 1 billion of the debentures are converted, the debenture holders would own 16% of the enlarged share capital.
The BlackBerry board also brought in high-flying CEO John Chen, known for his turnaround of enterprise software firm Sybase Inc.
ANALYSTS SKEPTICAL
Despite the deep-pockets and strong credibility of its investors, analysts have not been impressed by the move and question the long-term sustainability of the company.
"Now we're back to the downward spiral," said Colin Gillis, analyst at BGC Partners in New York. "They've got a USD 1 billion more cash that buys them time. The drumbeat of negativity is likely to continue. You hit the reset button, you've got an interim CEO. Time is not their friend."
"What happens is they continue to try to sell phones and service their existing customers and try to get traction in the enterprise and find a new CEO and cut costs, burn through some of their cash. Just what's been happening."
Other analysts such as James Cordwell at Atlantic Equities noted that the ""fact that Fairfax couldn't persuade other people is an indication that other investors take a more pessimistic view of the value in BlackBerry."
But some believe that the turnaround strategy may work.
"The new management brought in to right the ship will have both a mandate to do so (with a proven track record) as well as more breathing room (with the increased cash reserve)," Jack Gold, analyst at J. Gold Associates in Massachusetts, told Reuters. "I'd expect to see some significant redirections at BlackBerry over the next [six to 12] months as the new management takes hold and new business priorities and directions emerge."
"John Chen is a no-nonsense CEO who will hold people accountable, and will bring either new growth to the company or position the company to be acquired at a higher premium than it can currently demand. I see this situation as a long term positive for BlackBerry."
While Qatar has been drawn to the company by the attractive coupon rates, outlook for BlackBerry remains grim.
Canadian Imperial Bank of Commerce analysts recently downgraded BlackBerry's share to an under-perform rating with a price target of USD 5, from USD 12 previously. Jefferies Group analysts also cut their price target to USD 6, while Credit Suisse had a price target of USD 7.
All in, twelve investment analysts rated the stock with a sell rating, 26 have a hold rating, three have a buy rating and one has assigned a strong buy rating to the company.
QATAR'S NORTH AMERICAN PLAY
Qatari funds are looking for yields in an uncertain world. With Europe in turmoil, and emerging markets in sluggish growth mode, North America presents an interesting opportunity.
Earlier in the year, Qatar Petroleum teamed up with British group Centrica to purchase natural gas and crude assets in the Canadian oil patch for USD 1-billion.
Canada is one of the few developed economies that has weathered the global financial crisis quite well and the country's overall prospects remain far more promising than other developed nations.
While BlackBerry has seen its market share decimated in North America, it remains a formidable player globally and has considerable patented assets that could generate returns for its creditors in the event of a complete meltdown and bankruptcy.
Qatar Holding, no doubt, would have contemplated these possibilities, and felt its USD 100 million bet on Blackberry may not be misplaced, despite the company's uncertain outlook.
© alifarabia.com 2013
