Above The Fray

When Irish Eyes Are Smiling

I last blogged about BlackBerry in January. Since that time, BlackBerry has continued to be in the news virtually every day and there has been no let up in the negative views being expressed about the company. I readily admit that I misjudged the competitive threats BlackBerry was facing when I began purchasing shares in 2010. As a result, we currently sit with a significant unrealized loss on our BlackBerry holding. I clearly made some mistakes during our research process and I am committed to learning from this experience. With that said, I just think that the current single digit stock price (approximately half of book value per share) builds in a lot of bad news, more than is warranted by the facts.

In September, BlackBerry announced that it had signed a letter of intent with a consortium led by Fairfax Financial (Blackberry’s largest shareholder) to purchase the company for $9 per share in cash. I have to tell you that this offer is totally consistent with the past modus operandi of Fairfax and its CEO Prem Watsa. They are bargain hunters and they like to buy things cheap! I also have to tell you that the negative view currently being expressed about the deal by many is consistent with major Fairfax purchases in the past. But even I was surprised by the vituperative nature of the commentary after the Fairfax-BlackBerry announcement. The deal is being universally scorned as unlikely to ever be completed. Questions have been raised about whether Fairfax is even serious about its intentions or if any consortium actually exists. A well known business media news outlet even ran a television feature entitled “Is Prem Watsa Insane to Purchase BlackBerry?” Really? As John McEnroe used to rant on the tennis court “You cannot be serious!”

Let me walk you through a quick refresher course on the track record of Fairfax Financial and then you can draw your own conclusion about Prem’s sanity. Fairfax Financial was formed in 1985 when a company then named Markel Financial was recapitalized by a group led by Prem Watsa. In the 27 years since then, Fairfax has grown its book value per share at an annual rate in excess of 23% and its share price has performed similarly over the same time period. While we weren’t there right at the beginning we did get there shortly after and we have been happy shareholders ever since. It does require patience and a willingness to take a long term view to be a Fairfax shareholder as the returns are lumpy. We have always been willing to accept lumpy short term returns if they lead to higher returns over the long term.

As with any property and casualty insurance company, at Fairfax there is a portfolio of capital to be invested which comes mostly from the float provided by insurance premiums. By any measure, Fairfax’s investment results have been exemplary. For example, over the last ten years Fairfax’s equity portfolio has delivered a compounded annual return of 14.5% which is more than double the return from the S&P 500 Index over the same time period. Is Prem Watsa insane? You make your own judgement but with long term results like these I think you can guess my view on the subject.

In July 2011, a group including Fairfax, Fidelity Investments and Wilbur Ross purchased a 34.9% stake in the Bank of Ireland from the Irish government. Similar to the situation with BlackBerry currently, there was much commentary then about how foolish Fairfax was to be making such a risky purchase. Didn’t Fairfax realize that Ireland was a basket case and that the Bank of Ireland was sitting on a whack of bad loans on which it had no hope of being repaid?  For the record, Fairfax has now more than doubled its money on its Bank of Ireland stake.

Will BlackBerry be another Bank of Ireland success story for Fairfax? Candidly, my crystal ball is no better than yours. Prem Watsa and his colleagues are not perfect. They have made mistakes in the past and they will make mistakes in the future. However, it is hard not to recognize some of the similarities between the two situations. Certainly, the amount and volume of the commentary by naysayers is similar. To be dismissive of anything Fairfax is contemplating doing is to ignore one of the best investment track records on the planet!   As long time shareholders of Fairfax, we would be delighted to see great investment skill combined with a dollop of the luck of the Irish result in a winning bid for BlackBerry at $9 per share. It has the potential to be another Fairfax investment coup. Perhaps Irish Eyes Are Smiling!

 

“Above the Fray” is a regular blog written by Jeffrey Stacey, Chairman and CEO of Stacey Muirhead Capital Management Ltd., which discusses items of interest related to investing, finance and business. This is not a solicitation.

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One Comment

  1. Peter Kerr says:

    The media and market seem to be focusing on the wrong questions. What are the patents worth? What happens if the company is broken up? Will Blackberry continue to make handsets? Etc. Etc. My crystal ball is very cloudy on all these types of questions. Frankly, if the company is being taken private, they don’t matter.

    To an investor, the value of Blackberry today is simply the difference in the present share price compared to the US$9.00 promised by Mr. Watsa (or higher if there is more than one bid). My crystal ball is crystal clear that Prem Watsa’s word is his bond. If the margin of safety between those two numbers becomes attractive enough, then it will become a case of “Heads you win; Tails you don’t lose much”.