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Canada Backs Blackberry … But Why?

Government shells out millions to help Telefonica buy its phones


It’s no secret that governments often do a few things here or there to help big companies. After all, a successful company — at least in theory — means more tax revenue, more employment opportunities for citizens and the potential for spin-off industries.

Technology companies especially are seen as big prizes in these regards, as their jobs tend to pay more. Plus, the likelihood of an established high-tech company shutting down is low compared to a firm making a less in-demand product.

Of course, when governments do get financially involved, it’s usually in a subtle way. In the case of BlackBerry (NASDAQ:BBRY), however, all subtlety has gone out the window with the latest deal made in its favor.

A Different Kind of Deal

It’s hardly rare for governments to offer incentives in order to keep jobs. For example, GigaOm says North Carolina offered Apple (NASDAQ:AAPL) $46 million in tax breaks to build a massive data center in that state, along with a 50% discount on real estate taxes and a whopping 85% reduction on its property taxes.

A few years earlier, Google (NASDAQ:GOOG) negotiated tax breaks and incentives worth $212 million over 30 years out of North Carolina.

Even BlackBerry has received similar deals from the Canadian governments, including a February announcement of a whopping $10 million over five years from the government of Nova Scotia to keep 400 jobs in the province … after it received $19 million in 2005 to create them in the first place.

Now, though, the Canadian government is loaning Spanish mobile giant Telefonica (NYSE:TEF) $262 million to buy BlackBerries. So rather than shelling out money to keep jobs in a specific region, the government is actively loaning taxpayer money to a multinational giant in order to help prop up the floundering company.

Of course, the Canadian government has already gone on record saying it won’t block a potential foreign takeover of BlackBerry, should things not go as planned. Federal Finance Minister Jim Flaherty, quoted by CBC, said the company “will be the masters of their own destiny.

That may be, but it seems clear that BlackBerry can count on the Canadian government to have its back. This move isn’t not quite the same as directly offering BlackBerry a government loan, but it’s coming awfully close to a handout. 

Braving Possible Backlash

This raises a simple question: Why?

See, Telefonica isn’t some start-up network or even a super struggling company. It’s the world’s fifth biggest wireless carrier with 316 million subscribers. It earned over $5 billion on revenue of nearly $82 billion in 2012 and has nearly $15 billion in cash.

(Interestingly, virtually every mention of this story I was able to find — including that published by the CBC, Canada’s national broadcaster — says that Telefonica’s profit dropped to $4.4 million in 2012, when really it was €4.4 billion. I’m not saying there’s a conspiracy of misinformation here, but I suspect Canadians might have a bit more to say about the deal if they realized their money was going to help a company that makes in the neighborhood of $14 million in profit per day.)

Plus, the handout is pretty hefty. Considering the relative size of Canada, it would be the equivalent of the U.S. government offering up $2.5 billion to a company.

Of course, this is good news for Blackberry in the wake of its recent struggles. Besides some guaranteed sales, Telefonica also offers a large presence in emerging markets like South America, where regular old cell phones are still dominant. This is just the sort of low-hanging fruit that BlackBerry is targeting in an effort to grow its global marketshare without having to convert existing Android or iPhone users.

But toss in BlackBerry’s announcement a week prior that it had recorded a quarterly profit of $98 million in the most recent period, and you have the perfect storm for ugly sentiment on the Canadian government’s side. It wasn’t a move without risk.

Tipping the Scales Towards Tech

Still, a few factors shed light on why the Canadian government pulled the trigger. First, it’s not an election year, so any fuss would likely have died down before it could hurt reelection chances.

On top of that, BlackBerry means a lot to the Canadian economy. A Toronto Star article lays out what was at stake:

  • A Business Development Bank of Canada report blamed a loss of 23,000 Canadian jobs over the past two years largely on BlackBerry’s restructuring and cost-cutting and the resulting trickle-down effect. (Remember the size factor again; this would be the equivalent of over 200,000 jobs in the U.S. In fact, I live an hour from BlackBerry’s headquarters and can personally vouch for this, with numerous neighbors laid off from BlackBerry and its manufacturing partners.)
  • Canada’s technology sector has lost 150 companies in the past decade, including former high-tech stars like Nortel. It can’t afford to lose one of its remaining internationally recognized technology players.
  • Resource-based companies now dominate the Toronto Stock Exchange (TSX) with technology shares making up under 1% of the index. In the 1990s, Nortel alone accounted for 36% of the TSX value. While no-one wants BlackBerry to dominate the TSX to that extent, the current imbalance leaves the Canadian economy vulnerable to fluctuating resource prices. 

In other words, Canada is an economy that’s become highly dependent on resources, so it needs to preserve tech jobs and encourage growth in that sector. At the moment, BlackBerry is one of its few options. The smartphone pioneer is struggling, but the government would love to see it succeed and ignite another wave of Canadian tech success.

Priming the sales pump as the company launches its comeback bid is a good way to generate positive buzz at a critical time, while also helping BlackBerry’s bottom line.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, http://investorplace.com/2013/04/canada-backs-blackberry-but-why/.

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