No plan B
BlackBerry Ltd.’s withering smartphone business means potential acquirers will pick over its more alluring assets, including software and patents, which together may be worth about US$5 billion, roughly in line with the company’s current market value.
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The phone unit, BlackBerry’s biggest source of revenue, is essentially worthless because most buyers would shut it down in favor of their own technology, at a cost of as much as US$800 million, said analysts at Raymond James Ltd. and BMO Capital Markets. Its patents, software and a secure network are each worth more than US$1 billion, the analysts said, and the company has about US$2.8 billion in cash.
The Waterloo, Ontario-based company appointed board members last week to analyze a sale or new partnerships to try to turn the company around. The value of the hardware unit may plummet further as customers shy from buying a device whose future is up in the air, leading acquirers to gravitate to BlackBerry’s other assets, Brian Huen, managing partner at Red Sky Capital Management, said by phone on Aug. 19.
“You’re effectively killing that business by saying ‘I’m up for sale,’” said Huen, whose Toronto-based firm manages about $220 million in assets including BlackBerry shares. “Nobody is interested in buying the entire entity. I think they are now in the phase of saying, ‘We will do anything to maximize value, including breaking up the company.’”
Lisette Kwong, a spokeswoman for BlackBerry, declined to comment yesterday about a potential breakup and sale of the company’s parts.
BlackBerry hired JPMorgan Chase & Co and RBC Capital Markets 17 months ago to explore its strategic options as sales of the company’s once-iconic phones tumbled amid competition from Apple Inc. and Samsung Electronics Co. Those bankers contacted possible bidders late last year and found little interest in buying the whole company, particularly from private- equity firms, said two people familiar with those discussions.
International Business Machines Corp., made an informal approach to buy BlackBerry’s enterprise-services business in 2012, two people told Bloomberg in August of that year. IBM, based in Armonk, New York, was not interested in pursuing the whole company, the people said.
James Sciales, an IBM spokesman, did not return a request for comment yesterday.
The hardware business, which helped fuel net income of US$3.4 billion in 2011, lagged behind as the industry shifted to touchscreen devices with a wide variety of applications available for download. BlackBerry’s share of the global smartphone market fell to 2.9% in the second quarter from 4.9% a year earlier, behind Microsoft Corp.’s Windows Phone platform, Apple Inc.’s iOS and Google Inc’s market-leading Android, according to IDC, based in Framingham, Massachusetts.
Speculation that the company might be taken to private to be restructured or broken up out of the public spotlight accelerated after the Aug. 12 announcement, in which Prem Watsa, a Toronto-based businessman and BlackBerry’s largest shareholder, said he would step down from the board. The company did not mention going private as an option at the time.
BlackBerry rose 2.2% to US$10.54 in New York Tuesday for a market value of US$5.52 billion. The shares have tumbled 11% this year, leaving BlackBerry down more than 90% from its 2008 high.
“We struggle to assign any value to the hardware business given the belief the most logical acquirer of BlackBerry would likely attempt to transition BlackBerry’s subscriber base to its own competing smartphone products or ecosystem,” Michael Walkley, an analyst at Canaccord Genuity Inc. in Minneapolis said in an Aug. 12 note. He rates BlackBerry a sell.
In addition to its cash, BlackBerry has smartphone patents, an operating system that powers car-information systems and even nuclear power plants, and a network of secure servers that cater to millions of government and business users. The company had 72 million smartphone subscribers at the end of June.
Tim Long, an analyst at BMO Capital Markets in New York, puts the cost of shutting down BlackBerry’s hardware unit at about US$800 million, or US$1.50 a share. He rates BlackBerry a hold.
The company’s cash reserves will be worth about US$2.6 billion at the end of this fiscal year; its patents and other intellectual property might fetch US$1 billion; the network would be worth US$1.2 billion; and the software about US$1.5 billion, Long said in an Aug. 13 note to clients. Subtracting the US$800 million estimated cost of shutting down the handset businesses, that would give BlackBerry a sum-of-the-parts value of about US$5.5 billion, or US$10.50 a share.
Raymond James Ltd. put the value of BlackBerry’s patents higher, as much as US$1.6 billion, while ascribing a value of zero to its once-lucrative services business as the hardware losses erode the service revenue BlackBerry earns from each subscriber. Raymond James Ltd.’s Steven Li, said in an Aug. 12 note BlackBerry is probably worth about US$4.5 billion, or US$8.70 a share, if broken up. Toronto-based Li rates BlackBerry a hold.
A breakup scenario is more likely because few buyers want and are willing to pay for all of BlackBerry’s assets, even at the stock’s depressed valuation, Joe Compeau, an information- systems lecturer with Ivey Business School in London, Ontario, said by phone. That means it could be headed for the same fate as Nortel Networks Corp. The company filed for bankruptcy in 2009 and sold its main assets in a series of auctions that fetched US$7.8 billion for its creditors.
“What happened with Nortel, where they just started selling bits of it, that could happen,” Compeau said. “There’s not that many players who can extract value from all those different parts.”
Unlike Nortel, BlackBerry has never issued debt and had US$2.8 billion worth of cash and cash equivalents at the end of June, more than enough to ward off bankruptcy.
The company reported a loss last quarter and expects another loss this quarter, a sign the new phones do not have the traction with customers that Chief Executive Officer Thorsten Heins was counting on to drive a turnaround in BlackBerry’s fortunes. The company posted a $646 million loss in fiscal 2013, its first annual loss in a decade.
Sales of the new BlackBerry Z10 touch-screen phone missed analysts’ estimates by close to a million units last quarter. Investors will learn if the possibility of a company sale has scared off smartphone buyers on Sept. 27, when BlackBerry releases quarterly results.
Peter Misek, an analyst at Jefferies & Co. in New York, says that may already be happening. Monthly phone production was cut to 1 million units from 2 million units last month, and has since been cut by a further 10%, Misek said, citing supplier checks. He rates BlackBerry a buy.
“Leveraged buyout and acquisition headlines will cause enterprises to delay purchases until they have greater clarity on BlackBerry’s future as a company,” said in an Aug. 19 note.
BlackBerry Ltd headed for breakup as smartphone assets called essentially worthless | Financial Post