By Jennifer Ablan and Liana B. Baker
Samsung Electronics recently offered to buy BlackBerry Ltd
South Korea's Samsung
Representatives from the two companies, which are working with advisers, met last week to discuss a potential transaction, the source said, asking not to be identified because the conversations are private.
The Waterloo, Ontario-based company said in a statement that it "has not engaged in discussions with Samsung with respect to any possible offer to purchase BlackBerry. Shares of BlackBerry, which soared nearly 30 percent following the Reuters report, fell back about 15 percent in after-hours electronic trading following the statement.
Separately on Wednesday, Canadian newspaper Globe and Mail reported BlackBerry has shunned a handful of takeover overtures in recent months as its board and largest investor think its restructuring strategy will deliver greater shareholder value than current acquisition offers.
The board believes offering prices, some in excess of $7 billion, fall well below BlackBerry's potential asset value in the next few years, according to the Globe and Mail report.
CORPORATE MARKET
"BlackBerry is in such transition today, so any investment has been a bet on the future, so at this point Samsung is cutting in before that full future becomes a reality," said Morningstar analyst Brian Colello.
Samsung’s strength as the No. 1 global smart phone marker has been built on making devices for the consumer market, which has become crowded in recent years. With a takeover of Blackberry, Samsung could make greater inroads into the corporate market, where it has trailed rivals.
“How many Samsung phones do you see in offices? This would be Samsung’s chance to get into the enterprise,” said BGC Partners analyst Colin Gillis.
Any tie-up with Samsung would require the blessing of Prem Watsa, whose Fairfax Financial Holdings Ltd
The bid would also face regulatory scrutiny in both Ottawa and Washington. Under Canadian law, any foreign takeover of BlackBerry would require government approval under the Industry Canada Act.
BlackBerry's secure networks manage the email traffic of thousands of large corporate customers, along with government and military agencies across the globe.
PATENT PORTFOLIO
Samsung thinks that acquiring less than 100 percent of BlackBerry, perhaps keeping part of it as a publicly traded entity with an independent board, could help secure easier CFIUS approval. But it doubts whether it can accomplish its strategic objectives with less than 100 percent ownership, the documents show.
In 2013, the Canadian government had strongly hinted to BlackBerry that any sale to China’s Lenovo Group would be rejected due to security concerns, sources told Reuters at the time. Harper's office wouldn't comment on the report on Wednesday but sources familiar with the Canadian government's thinking said a Samsung buyout was unlikely to raise such concerns.
Ross Healy, a portfolio manager at MacNicol & Associates, which owns a small stake in Blackberry, said Samsung's reported offer undervalues the company.
“To get a hold of the BlackBerry network and all its secure features, that would be a real coup for Samsung, looking to differentiate themselves from Apple and from others," he said.
Blackberry's patent portfolio is composed of roughly 44,000 patents, worth more than $1.43 billion in net book value as of August last year, although many analysts think they could be worth much more.
Edward Snyder, managing director of Charter Equity Research, said it made sense for Samsung to target BlackBerry's patents in its outgoing battle with Apple and others, and that it likely would need to bid for the whole company because BlackBerry management did not want to only sell specific assets.
"Samsung will have to buy the whole thing and then and shutter what they don't need,” he said.
BlackBerry launched its long-awaited Classic model on Wednesday, hoping to help win back market share and woo customers still using older devices with a keyboard. The phone resembles its once popular Bold and Curve handsets.
In the third quarter, revenue at Blackberry, which is increasingly focusing on providing services like secure corporate networks, fell to $793 million from $1.19 billion a year earlier, falling short of analysts' expectations of $931.5 million.
Shares of Blackberry jumped as much as 30 percent on heavy volume in afternoon trading at $29.71 per share in New York.
The offer price would imply an enterprise value of $6 billion to $7.5 billion for BlackBerry, assuming conversion of $1.25 billion of convertible debt, according to the documents.
(Reporting by Jennifer Ablan and Liana Baker in New York, additional reporting by Alastair Sharp and Allison Martell in Toronto and Randall Palmer in Ottawa, Editing by Soyoung Kim and Christian Plumb)