The largest shareholder of BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) scuttled the potential for a leveraged buyout and says that the social media frenzy is the “sort of speculation will end just like the previous tech boom in 1999 – 2000 – very badly!”

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In a letter to investors V. Prem Watsa, chairman and chief executive officer of Fairfax Financial, an investment holding company with over $30 billion in assets under management, detailed the story behind the story.

Offer to take Blackberry private turns into debt deal after all-star due diligence

On September 23, 2013, Fairfax made an offer to take BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) private at $9 per share, subject to a six-week due diligence period. Watsa noted that during this due diligence process, he resigned from Blackberry’s board so Fairfax could evaluate options as well.

Watsa pulled together an all-star team to conduct due diligence.  The team was led by Sanjay Jha, former chairman and chief executive officer of Motorola Mobility and former chief operating officer of Qualcomm, inc. (NASDAQ:QCOM).  Then he brought in Sandeep Chennakeshu, who was President of Ericsson Mobile Platforms, and John Bucher, who was Chief Strategy Officer at Motorola Mobility.

This group drew three primary conclusions: 1) the company had excellent assets, 2) the management teams had made many mistakes along the way, and 3) the company could not afford high cost LBO debt.

“For the first time in our history, our due diligence resulted in our not being able to complete an announced deal”

“For the first time in our history, our due diligence resulted in our not being able to complete an announced deal,” Watsa wrote. “After discussions with the Special Committee, led by its Chair Tim Dattels, instead of continuing with a go-private transaction, we proposed to raise $1.25 billion for BlackBerry in the form of 6% seven-year convertible debentures (convertible at $10 per share into BlackBerry stock) and proposed that John Chen be concurrently appointed as Executive Chairman of BlackBerry.”

ValueWalk reported on the convertible debt on January 9, but the details of Watsa’s deliberations have yet to be public.  At the time the report noted the Prem Watsa-led company has 14% equity stake in BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB), which was debt free before the financing deal. Fairfax Financial Holdings Ltd (TSE:FFH) (OTCMKTS:FRFHF) has given investors a time up to January 13 before buying additional BlackBerry debt, so that the investors could get to know the latest financial information provided by the company on December 20th.

Stock up more than 15% under new CEO Chen

Since taking the helm at Blackberry, Chen has been a leader in many respects, and the stock price, up more than 15% to $9.80 as of today, has responded. In a February 13 ValueWalk report we noted that Chen had compared Blackberry to the “Porsche of Telecoms.”  In the report we noted Chen’s outlook on BlackBerry, saying it serves two key purposes: it has a high functioning keyboard for people who still care more about productivity than the number of apps available to them, and it has the best security in the market. Chen estimates that the regulated industries account for about 30% of all IT spending and figures it should be a comparable percentage for telecom spending. Even if BlackBerry never regains its standing with general consumers, it can be a profitable company by leading a third of the market (the wealthier third, generally speaking).

Sybase should  “Ring a bell” with Blackberry investors

Watsa is optimistic on Chen’s addition to BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) as well, saying Chen “has an extraordinary background.”  Chen, after immigrating from Hong Kong at the age of 16, joined Sybase the stock was down 90% and analysts were predicting bankruptcy.  Within six months Chen turned the company profitable and the company started trading near $6 per share.  After twelve years of profitable management, SAP purchased the stock for $65 per share.  “Ring a bell,” quips Watsa, hoping for a similar outcome at Blackberry.

Since his appointment as Executive Chairman at BlackBerry in November 2013, the report notes John has bolstered the management team, competed a joint venture with FoxConn to manufacture low cost phones for emerging markets, brought back the ‘‘BB Classic’’ phone (the Q20) and publicly said that BlackBerry would break even by the fourth quarter of fiscal 2015 (i.e., the quarter ending January 2015).  “John is on his way – and all BlackBerry shareholders are fortunate that he decided to take the job of saving Canada’s iconic technology company,” Watsa wrote.

Watsa Twitter

Watsa then moves to compare BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) to Twitter Inc (NYSE:TWTR) and other social media firms.  Twitter went public at $26 per share, the letter notes, giving it a market value of $18 billion. Twitter had revenues of $665 million and losses of $645 million on a thinly traded market.  On the day Twitter went public, BlackBerry traded in excess of 100 million shares at $6 per share, giving it a market value of $3 billion. BlackBerry had revenues of approximately $8 billion with cash of $2.6 billion and no debt other than the new convertible debt to be issued. “If you thought that Twitter was grossly overvalued at $26 per share, it promptly doubled and currently is selling at $55 per share, with a market value of $39 billion,” Watsa noted, then said Twitter is just one of many overvalued social media stocks.  “This sort of speculation will end just like the previous tech boom in 1999 – 2000 – very badly!”