Fresh off beating its quarterly earnings estimates, BlackBerry Ltd (NASDAQ:BBRY) announced on April 12 it won a binding interim arbitration decision awarding the company $815 million as a result of royalty overpayments made to Qualcomm, Inc. (NASDAQ:QCOM) between 2010 and 2015. Not surprisingly, BlackBerry stock jumped almost 20% on the news.
BBRY stock hitting a 52-week high in April 12 intraday trading is a clear sign investors view the company’s surprise win against Qualcomm as a major victory — but is it enough to win the war to remain independent? Or does it get bought out now that it’s flush with cash?
Here’s my take on both sides of the argument.
BBRY’s Turnaround Just Gained Speed
CEO John Chen is in the middle of transforming the former handset maker into a software company that can compete with the big boys like Microsoft Corporation (NASDAQ:MSFT); an $815 million payday is like winning the lottery given it represents about 15% of market cap.
Analysts expect Chen to use the cash for acquisitions and grow the sales team.
“We believe any acquisitions to build out BlackBerry’s IoT sales channels would be attractive,” TD Securities analyst Daniel Chan wrote in a note to clients. “Moreover, the cash could be used to continue to build out the company’s own sales team.”
As mentioned, BBRY stock had a better-than-expected fourth-quarter report, generating a non-GAAP profit of 4 cents per share, seven cents better than a year ago and three cents better than the 1-cent estimate for the quarter. More importantly, BlackBerry believes it will make a full-year adjusted non-GAAP profit in fiscal 2018.
“Looking ahead to fiscal 2018, we expect to grow at or above the overall market in our software business,” said Chen in the Q4 2017 press release. “We also expect to be profitable on a non-GAAP basis and to generate positive free cash flow for the full year.”
Throughout 2017, BlackBerry has done an excellent job strengthening its balance sheet; the $815 million arbitration award will bolster it even more. As of Feb. 28, 2017, BlackBerry had cash and investments totaling $1.7 billion and long-term debt of just $591 million for net cash of $1.1 billion. Add the $815 million to the pile, and it’s going forward with expectations of a fiscal profit and $2 billion cash to make some software moves.
I don’t think there’s any way to possibly understate what a big deal this award is for BBRY stock and the company’s future.
My only question is whether all this cash makes the company more significant target.
Who Might Buy BlackBerry?
I read with interest that L’Oreal SA (ADR) (OTCMKTS:LRLCY) has put its Body Shop division up for sale. Body Shop was made famous by founder Anita Roddick’s concern for the environment at a time when no one was paying attention to this subject. It attracted more than 15 different bids from private equity firms.
BlackBerry is a perfect takeover target.
Private equity firms look for companies to acquire that they either can grow or cut expenses to the bone and then sell to someone else or take public. Most of the fat has already been taken out of BlackBerry, so that leaves growth as the only option.
The problem with my theory is that Chen has worked very hard to cut debt; to saddle it with the kind of debt private equity lays on businesses would be counterproductive at this point in the company’s transformation. After all, the argument goes, if you’re going to add debt, make it count. Don’t do it to line someone else’s pockets.
Bloomberg discussed the private equity option in an article from September 2016 but concluded that it would be too costly for private equity who would have to pay 30 times EBITDA, putting the onus on the private equity firm to come up with a significant chunk of the purchase price.
BlackBerry’s adjusted EBITDA in fiscal 2017 was $182 million with an operating loss of $1.2 billion. Let’s assume adjusted EBITDA doubles in 2018. At 30 times EBITDA, the purchase price becomes $10.9 billion. Back out $1.9 billion in cash after eliminating the debt, and you get $9 billion or a 66% premium to its current $5.4 billion market cap.
With help from a pension fund, this is a very doable deal.
Bottom Line BBRY Stock
Things have certainly gotten interesting in a hurry for BlackBerry.
In February I balked at recommending BBRY stock because, although cheap, it was very much in transition. Fast forward to today, and I think my opinion changes.
BlackBerry won the battle — and if it plays its cards right, it can win the war. Investors face less risk today than they did just two months ago. If it drops back to $7, I’d be buying in bulk.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
