BlackBerry- New Dawn or Beginning of the End?

Edited by Vani Rao

Fairfax Abandons Takeover Plan; Management Reshuffle with John Chen Taking Over as Interim CEO

Further to our earlier story on BlackBerry Ltd. (NASDAQ:BBRY), the company announced on Monday that it was no longer up for sale after Fairfax Financial Holdings, its largest shareholder, abandoned its takeover plan. Fairfax had had until Monday a formal offer following a preliminary takeover proposal made in September to acquire BlackBerry for $4.7 billion or $9 per share.

 BlackBerry has also undertaken a management restructuring with Thorsten Heins stepping down as CEO and JohnS.Chen, former CEO of Sybase Inc., taking over as interim CEO while the company seeks a permanent replacement.

Following the news, shares of BlackBerry plummeted 16.4%, or $1.27 to $6.50.The beleaguered company’s stocks have fallen 45% so far in 2013.

Year-to-date Stock Price Movement for BlackBerry

Source: Bloomberg
Source: Bloomberg

Move That Failed!

Back in August, BlackBerry had stated that it was exploring options that could include an outright sale after having steadily lost market share to rivals in recent years. While Lenovo, Amazon, Cisco, Google, and SAP have evinced interest in BlackBerry, the company also met Facebook officials to discuss the possibility of a buy-in.

Cerberus Capital Management LP, specializing in investing in distressed assets, was seen as a potential bidder alongside BlackBerry Co-founders Mike Lazaridiz and Doug Freginas well as chipmaker Qualcomm Inc. (NASDAQ: QCOM). Mike Lazaridiz and Doug Fregin own about 8% stake in BlackBerry.

Industry experts feel that Fairfax’s failure to acquire BlackBerry is not because of intent but due to its inability to attract potential buyers. Several banks were reluctant to participate in the deal due to concerns that the company would not be able to reverse its declining fortunes. A lot was riding on BlackBerry’s new OS BB10, which was plagued by delays in production and ultimately failed to convince consumers.

Potential bidders for the company were only interested in picking up parts of BlackBerry’sbusiness. In addition, bidders from PE firms were mostly interested in BlackBerry’s BB10 operating system and patents related to keyboards.

Not Worth It?

The failure of BlackBerry’s last ditch efforts to put itself up for sale and the recent announcement of convertible debt investments in the company makes one think that the company is even worth $9 per share as it stands.

The lack of interest shown in BlackBerry might not because of the company not being attractive, but gives an assessment on the complexity of today’s competitive environment and the challenges it faces after years of inaction. In addition, the company has been slow to act upon the rapidly changing dynamics of the smartphone market, where it was once the pioneer.

There is still considerable value left in BlackBerry’s service business, which includes its secure network, BB10 operating system, and patents. As shown below company’s disclosed intangible assets, including of patents, trademarks, copyrights, business methodologies, as of Sep 30’ 2013 is around $3.5 billion.

BlackBerry Quarterly Trends of Disclosed Intangible Assets, Book Value per Share and Enterprise Value (EV)

Source: Bloomberg
Source: Bloomberg

With $12.5 billion of assets, including $3.5 of intangible assets, and above $4.1 billion in liabilities as of August 31, 2013 blackberry equity still stands at $8.4 billion, which translate into a book value of $16.37 per share, or P.B ratio of 0.40x. Considering this, the book value could be raised further. These numbers show that BlackBerry is a fairly undervalued stock; however, it is uncertain whether BlackBerry would ever come out of the downward spiral.

Win–Win for Fairfax

On Monday Fairfax said that rather than acquiring BlackBerry, it would lead a consortium of investors pooling in $1billion in the form of convertible debentures, with Fairfax investing $250 million of its own in the troubled handset maker. Fairfax CEO Prem Watsa would rejoin BlackBerry’s board as lead director.

Further, Fairfax and the group of investors can purchase up to $250 million of additional debentures within 30 days. All the $1.25 billion worth of debentures when converted would represent around 19.2 % of the total shares outstanding of the company.

The group of investors led by Fairfax has actually bought debt instead of shares where the debtor (BlackBerry) will pay an interest of 6% to the group. This debt is convertible into stocks at a price of $10 per share.The investors believe that if BlackBerry witnesses a turnaround,the share prices would go above $10, which will trigger into a profitable conversion of debt into equity. On the other hand, if BlackBerry is sold later as an entity or in pieces, this deal will allow the debt holders to be repaid.

Even in the extreme scenario if BlackBerry is declared bankrupt in about four years, the group of investors would have recovered 24% of their investment in the form of interest payment. Moreover, since BlackBerry does not have any long-term debt on its balance sheet, the investment would allow Fairfax to be prioritized ahead of equity shareholders in case of liquidation. Creditors would also have a major say in restructuring plan.

FairFax and the group of investors are still optimistic, but not enough to outright buy the company. This deal puts Fairfax in control of BlackBerry and has much upside potential with lesser risk.

Is Chen the Man?

John S.Chen currently serves on the board of Wells Fargo and Walt Disney Co. He is also the former CEO and Chairman of Sybase. Chen was credited for changingSybase from a slow growth technology company into a high growth innovator. Numbers tells the same story as he led the company from $362 million to $5.8 billion with an impressive 55 consecutive quarters of profitability and 28 % CAGR before it was acquired by SAP AG in 2010.

It would be interesting to see how Chen would be able to translate its success from a slow moving database industry to rapidly changing smart phone environment. As we know, retail consumers are less patient than corporations having a large amount of choices. We would not be surprised if Chen and the Board decides to spin off the troubled device business and concentrate on the better performing enterprise business.

What Lies Ahead

BlackBerrycurrently stands at crossroads, and it is painfully clear that it needs to take smart decision and that too quickly. It will face tough choices in order to make in regards consumer vs.corporate, data management or hardware, security or popularity, or perhaps there would be a middle path.

There are speculations that the company can spin off its device making business and focus on its enterprise businessmanaging fleets of e-mail servers and corporate and government customers. Its enterprise software services is still performing well and can be the backbone of the brandwith customers using third party smart phones that are able to run its proprietary software.Customers would then still have access to BlackBerry’s security features and hugely popular messaging services.

The deal raises few questions; if the board were to raise debt at a time where there no lenders, and believe that with little cash and extra time they would be able to turn around the company, why sell 20% of company’s stake alongside paying interest. Only board can answer, if there is something more than meets the eye?

On a different note, there are few things that we look forward to. Would BlackBerry be able to rejuvenate itself and would its share price reach the glorious heights of yesteryears enough to justify the conversion and repay its debt? Would the company be able to find a savior or would it just fade into oblivion to become part of the history!

For BlackBerry,right now there are no real answers

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