The Road To Destruction
To say that the Canadian company formerly known as Research in Motion has been a pain to its shareholders during the last few years is an understatement! Who could have imagined that the once must have gadget, that became known as the “crackberry” due to its addictive nature, would see its stock fall from just under $150 in 2008, to $9 today? The tech arena is littered with former giants that were usurped and felled by new upstarts and perhaps there is a warning here for Apple shareholder still, even after the drubbing they have seen this last 18 months…
Shareholders such as Prem Watsa that has backed management and in particular Thorstein Heins, are likely to align with agitator Jaguar Financial that is heavily under water and that has been calling for the breakup of the group since 2011. Investors and analysts have given up on the prospects of a turnaround for the phone maker following the introduction of its new Blackberry 10 phone into the marketplace and that it was hoped would compete with the Android and iOS ecosystems.
At the last conference call when the company presented its earnings, it revealed a swing into loss, and more worryingly, one that will continue next quarter. New phone sales were disappointing, coming in at just 2.7 million for an entire quarter. Following the delay of the launch of the actually technically lauded BB10, the bar was put very high, and it seems that although from a usability perspective, the new phones are near best in class, that they have, sadly, just simply missed the market. One of the other criticisms too is that the phone is price to near the high-end segment, which is near the iPhone and that the “cult of Apple” still exists and so at the same price, consumers would plump for the “sexier” Apple iphone.
Book value undervaluation
The simple truth about Blackberry now is that investors just don’t believe management can do much more in the face of the competitive landscape, as evidenced by the pricing of the company’s equity at just $4.6B – way below its book value. In fact, and as we have stated in the past on this blog, stripping out the $2.8bn in cash, the balance of the company is valued at just $1.8bn. For a company with $3.5bn in patents and intangibles, that’s frankly peanuts.
The problem is that investors also believe the company will burn its cash position in an attempt to market the new phone and O/S, and that the discount to book value will therefore narrow as time progresses and value is eroded. Where do we think this will all end?
As regular readers will know from my editor days, we love it when investors are in a panic and “baby’s get thrown out with the bath water”. That frequently is one of the best times to buy. To us, there are at least three options that may value the company above the current $9 price.
First, the business could effectively be closed “as is” and assets returned to investors. Even though it is not certain how much the Group’s assets would be worth under such conditions, we’re sure it won’t be tough to receive $1.8 billion for everything.
Second, the company can carry on with “business as usual”. A return to the hype of 2008 is a tall order, but with appropriate cost-cutting, the company could potentiall return to profit. Besides selling hardware, the company sells services and has a large subscription base which helps maintain margins and profit. At the same time, it does excel in the security of emails arena and definitely gives the company an edge in this segment.
Third, and in our opinion the most likely, Blackberry may be a takeover target. This is the best option for investors at this point, as it would potentially value the company at least near its book value. Question is who would most likely buy Blackberry?
It has been widely speculated that Lenovo may be a potential acquirer. That’s possible, but would be costly for Lenovo. With 3.8bn in cash and 15bn in assets, Lenovo is certainly in a position to buy Blackberry but, if a large premium was paid towards $8-9bn this would result on Lenovo taking on quite heavy debt, something I’m not sure they’d like to do at this point.
With Lenovo being a mirage on the deserted island that Blackberry currently sits on, we could in fact see Samsung attempting to diversify its phone business with some new flavor given to its Android manufacturing line. With $17B in cash, and total assets around $171B, it certainly wouldn’t be difficult for Samsung to acquire Blackberry.
With an operating system best known for its stability and security, Blackberry could in fact very well be the takeover target of some defense company. They could use the technology for their communications equipment but would likely divest the handset division and we’re not sure who the buyer would be here…
Finally, there is a huge opportunity here for one particular company, one which certainly has the clients to sell a few million-unit phones in just a matter of days and likely double Blackberry’s value in less than a month. This company has a subscription base of 600 million users too. Purchasing Blackberry would, financially, have as much impact as an ant can inflate on an elephant! With a cash position of around $393bn (yes, that’s right billion), they can pay $10bn for BBRY without their accountant even noticing it. Such an acquisition would give them more control over costs and potentially open a whole new market. Who are we talking about? China Mobile of course.
Richard Jennings, CFA. Titan Investment Partners
Clear Disclosure – Titan Global Macro holds a long position in Blackberry