Blackberry: Countdown TO the Takeover BEGINS…

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The eponymous and once must have gadget, the BlackBerry aka the “crackberry” for its addictive nature, is under pressure once more with Thorsten Heinz’s bet the ranch strategy on the new BB10 (pictured) being questioned by analysts as the shares slide back into single digits. It seems that wresting the front field back from the seemingly more glamorous iPhone and Android systems is a push too far that is sadly beyond the best efforts of the Canadian company…

Since 2011, Blackberry has been working hard to deploy a new operating system that is able to enrich smart phones and tablets. The launch of the much-anticipated BB10, which finally occurred after many delays at the end of last year, initially met with market enthusiasm and reports of sell outs that drove the stock towards $20/share. Expectations were high for the first complete quarter sales figures but now that we have the final numbers, it seems that the expectations were over cooked.

The operating system itself actually is a bit of a ground breaker but the market seems to be too sewn up and management were simply too late to the game. Obtaining the sufficient penetration of entrenched Apple and Android users was near impossible.

The company sold 1 million units in the last month of 2012 and another 2.7 million in Q1 2013 and produced revenue of $3.1bn for the first quarter. Revenue growth was actually 15%, but management still turned in a net loss for the quarter of 16c per share. Although this appears healthy, the figures were lighter than the markets optimistic estimates and, since the report just under 2 weeks ago, the shares have fallen almost 40%, in fact back towards their cash and net current assets value with the current market cap of just under $5bn comparing to the cash pile of just over $3bn. Many are now asking is this the start of the end for Blackberry?

We must admit that selling 1 million units per month was not the kind of performance we were looking for when a new product like the BB10 was just launched. With the rebirth of a once loved product, it would be expected that rather more hype could have come from the introduction of the new and most advanced BlackBerry technology ever, particularly given the use of Alicia Keys as their main celeb promo partner. Sadly that wasn’t the case.

With still relatively healthy gross margin sitting around 34% many could be forgiven for asking why the stocks enterprise value is so low. It seems that investors are expecting their marketing and selling expenses to grow even further during the next few quarters as the company will aggressively try to remarket their phones – something that many think is akin to whistling in the wind. We also think this is a real risk and expect that major investor Prem Watsa will now push for a break up or outright sale of the business. If this occurs we would expect a price towards the late teens to be achieved.

Prem Watsa

The smart phone market is becoming increasingly difficult to penetrate. Apart from Android-enabled phones and the iOS devices, there’s not much left for the others and it will be tough to convince people to return back to Blackberry. We expect that this unassailable situation is what will force consolidation and with BBRY actually having a fantastic operating system there are likely to be multiple potential suitors with Lenovo in the front seat. At the current market cap, the company, even with a 50-60% control premium, is just a mere morsel for many of these potential acquirers. Blackberry’s new O/S is the best in class in terms of security features and so which could give the company some leverage when looking for corporate and government clients who do remain loyal and also provide a stable backbone to the company’s revenues.

With the company trading at a price-to-book ratio of just 0.50 it is priced to go. Even if we put intangibles aside and write them to zero (which is highly improbable), the company’s tangible assets are worth around $3 more than the $9.55 price. Thorsten Heinz has been given his shot to turn the company around and show his investors it could compete alone, and he has made a valiant effort that can only really be applauded. However, he knows that the game is up now.

To us, it is only a matter of time before the “receipt of a takeover approach” announcement is made, particularly given that the company has been carrying out a “strategic review” for nearly 12 months now too – something that the market seems to have forgotten this last few weeks and that is very likely, Plan (B).



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