Blackberry Ltd. (NASDAQ: BBRY) – BUY Is Liquidation Value Higher than Market Cap?

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Blackberry announced on Friday, 20th September 2013, that it will cut 4,500 jobs or about one-third of its estimated work force. This comes on the wake of dismal Q2 earning numbers (an expected Net Operating Loss of around $1 billion) and a corporate write-down of $960 million on its Z10 inventory. The Wall Street Journal also reported on Friday that the firm is selling its corporate jet, which it had purchased in July 2013. The discerning investors might just be wondering if they can trust a management, which, even after observing the dismal Z10 sales, bought a jet plane.

Actual handset sales numbers, rather than management and earnings, are the long-term success indicators of a handset company. While analysts were expecting sales of $3.03 billion, the actual numbers for Q2 came in at $1.6 billion. This is the key number that will concern investors.

Taking a contrarian view on this stock, we believe that the stock is oversold. We will provide a liquidation value for Blackberry in the next few paragraphs to support this thesis. Subsequent to a company announcing that it is looking to sell itself (BBRY announced that in Q2), the optimal way to value the stock is by a sum-of-the-parts or liquidation value analysis. Looking at the value of Blackberry from the perspective of a buyer, we can analyze whether short-term profits can be extracted from the potential merger price. The risk, of course, is that the merger may not go through. The risks are already priced into the markets, especially as BBRY fell to its recent low on Friday and ended the day at $8.725 (down $1.795 on the day). However, a higher merger price can yield some short-term value. This is certainly a risky strategy, but then, merger arbitrage opportunities always are.

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Blackberry has Total Liabilities of $3.7 billion, which can be covered with Short Term investments of $1.2 billion and Accounts Receivables of $2.4 billion. It also has cash and cash equivalents of $1.59 billion. If we put a haircut of 50% on Inventories of $887 million, Other Current Assets of $870 million and Net Fixed Assets of $2.2 billion, we get a value of about $3.5 billion (including cash). Additionally, according to analyst estimates, Blackberry owns patents worth over $3.0 billion. With the recent Motorola acquisition by Google and the 10-year license of Nokia’s patents by Microsoft for $1.55 billion, we can safely conclude that the beleaguered company’s patents will be of interest to a potential buyer. To sum it up, we do not expect a buy price of less than $6.0 to $6.5 billion for BlackBerry. With 524 million shares outstanding, we expect per share price bids between $10.00 and $12.00 – an expected upside of more than 25% from current levels.

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