Was a Sellout Part of the BlackBerry Turnaround Plan?

by Brad Moon | August 12, 2013 12:00 pm

Was a Sellout Part of the BlackBerry Turnaround Plan?

For BlackBerry (BBRY[1]) watchers, the pleas from CEO Thorsten Heins for more time have become all too familiar. More time to release BB10 phones to all markets, more time for new models to hit the pipeline, more time for its new BlackBerry Enterprise Server 10 to roll out to corporate and government clients. More time to turn the company around.

Amid the impatience and continued bad headlines[2], news hit last Friday that BlackBerry was exploring going private[3]. Doing so would theoretically take the investor pressure off Heins so he could focus on the turnaround instead of constantly pleading for patience.

All bets are off today. Trading on BBRY was temporarily halted this morning as news broke that the company has effectively put itself up for sale.

In a press release put out by BlackBerry this morning[4], the company announced that its board of directors had created a special committee to explore options that could include “possible joint ventures, strategic partnerships or alliances, a sale of the Company or other possible transactions.”

In addition, the company noted that Prem Watsa, chairman and CEO of Fairfax Financial (FRFHF[5]) — the company that doubled its investment in BBRY in January[6] and now holds a roughly 10% stake — is stepping down from BlackBerry’s board to avoid potential conflicts in the process. Naturally, this leads to the assumption that Fairfax and Watsa could be interested in buying the company.

All of this raises the question of whether BlackBerry is worth buying, something individual investors have been pondering for the past year.

CEO Heins was quoted in the press release as saying: “We continue to see compelling long-term opportunities for BlackBerry 10, we have exceptional technology that customers are embracing, we have a strong balance sheet and we are pleased with the progress that has been made in our transition.”

In other words, the same placating words about progress combined with the same refrain about the longer-term: patience.

But does BlackBerry have the time? In Q2 2012, the beleaguered company sold 7.7 million smartphones. Those were the outdated models that were several years behind the competition in a market where BlackBerry faithful were holding off as long as they could in anticipation of hot new BB10 models. Fast-forward to Q2 2013, and the rebranded company is six months into its turnaround, the new BB10 phones running the next-generation operating system are on the market and yet sales dropped to 6.8 million. Instead of a surge, the turnaround efforts netted a 12% decline in sales.

Meanwhile Microsoft’s (MSFT[7]) Windows Phone — despite a slow start and having only one major supporting smartphone manufacturer in Nokia (NOK[8]) — has overtaken BlackBerry for third place in global market share. And as tablets continue their assault on the enterprise and home PC market, BlackBerry has abandoned its PlayBook and ceded that market for all intents and purposes.

What’s left that’s worth buying?

While numbers have been disappointing so far, the company does have a spanking new OS in BB10 that’s living up to its predecessor’s reputation for security — something enterprise and government customers like. There are the new BB10 smartphones to go along with it, the Q10, Z10 and Q5.

There’s also BlackBerry’s cash reserves and its patent portfolio. Those cash reserves are still at $3.1 billion. No one knows for sure how much the patents might bring, but in a litigious technology sector where patents are coveted for defensive purposes and as potential weapons, they could be worth in the $1 billion to $4 billion range.

Various studies have attempted to put a monetary value on the company’s user base and services[9] (such as BlackBerry Messenger), but assigning an actual dollar figure for these is a tough call — their value is contingent on keeping the customers and having them continue to pay for services that might or might not survive a sale of the company.

Making things even murkier, a cheaper Q5 BB10 phone is headed to traditional BlackBerry strongholds in Latin America, but the company will face increased competition there. Chinese manufacturers like ZTE and European carriers like Telefonica (TEF[10]) are aggressively targeting these emerging markets with cheap smartphones[11] running Android and the new Firefox OS.

As BGR puts it, with all the variables in play, any potential buyer trying to determine how much BlackBerry is actually worth would be flying blind at this point[12].

Going private is an option that’s obviously on the table. Prem Watsa sees something in BlackBerry, and his resignation from the board indicates he might try something along those lines. Time and the ability to transform a struggling company without investors demanding quarterly progress is the same goal Michael Dell has[13] in his bid to take Dell (DELL[14]) private.

With trading resumed, BBRY is currently up by more than 5% (it was up 9.4% in premarket trading), though at roughly $10.25, it’s still a far cry from the nearly $15 it was sitting at before its June earnings report with news of a loss, disappointing smartphone sales and declining subscribers sent it plummeting 30%.

An analyst with Canada’s BMO Nesbitt Burns was quoted in the Globe & Mail on Friday as saying: “We are maintaining our market perform rating. Our valuation puts the stock value at $8 based on fundamentals[15], but we could see more excitement as we learn of strategic alternatives for the company.”

I guess we’ll find out how much that “excitement” is worth in coming days.

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

Endnotes:
  1. BBRY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBRY
  2. bad headlines: http://bgr.com/2013/08/07/windows-phone-blackberry-market-share/
  3. BlackBerry was exploring going private: http://www.theglobeandmail.com/report-on-business/blackberry-open-to-going-private-sources/article13680709/
  4. In a press release put out by BlackBerry this morning: http://press.blackberry.com/press/2013/blackberry-board-of-directors-announces-exploration-of-strategic.html
  5. FRFHF: http://studio-5.financialcontent.com/investplace/quote?Symbol=FRFHF
  6. doubled its investment in BBRY in January: http://www.bloomberg.com/news/2012-01-27/rim-investor-fairfax-financial-doubles-stake-in-blackberry-maker.html
  7. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  8. NOK: http://studio-5.financialcontent.com/investplace/quote?Symbol=NOK
  9. put a monetary value on the company’s user base and services: http://bgr.com/2012/07/13/rim-sale-patents-ip-services-hardware/
  10. TEF: http://studio-5.financialcontent.com/investplace/quote?Symbol=TEF
  11. aggressively targeting these emerging markets with cheap smartphones: http://investorplace.com/2013/08/firefox-os-could-be-trouble-for-windows-blackberry/
  12. would be flying blind at this point: http://bgr.com/2013/08/09/blackberry-private-analysis-blackberry-10/
  13. Michael Dell has: http://investorplace.com/2013/07/winners-and-losers-if-dell-goes-private/
  14. DELL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DELL
  15. Our valuation puts the stock value at $8 based on fundamentals: http://www.theglobeandmail.com/report-on-business/top-business-stories/blackberry-for-sale-smartphone-smart-move/article13708870/

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