Back on the 7th of August we suggested, somewhat presciently, that there was every chance that we would see a short squeeze in Blackberry. Without wishing to sound too smug, our timing was immaculate and we reposted the article on the 9th of the month with the stock up by 10% since our original comments (see here – http://www.spreadbetmagazine.com/blog/a-reminder-of-our-blog-earlier-this-week-as-bbry-trades-up-1.html).
Since that piece was published a lot of water has passed under the bridge and there has been much speculation about who might be interested in Blackberry and what the company may be worth so it seems to be an appropriate juncture at this stage to look at Blackberry’s valuation, consider a possible exit price and analyse who are the likely suitors.
Firstly then, let’s consider Blackberry’s valuation the stock closed last night at US$10.45 giving the company a market cap of some US$5.25 billion. The first thing to draw you attention too is the fact that Blackberry has more than US$3 billion of cash on its balance sheet , furthermore Blackberry has no debt, yes that’s right no debt. So the current market cap places a modest value on the enterprise itself. There are a few commentators pointing out that in fact the company has, supposedly, been “shopped around” to various outfits over the past 12 months, seemingly with little interest. We do not subscribe to this view however and believe that once one party sticks their head over the parapet that there will be a few others looking to, most likely, take various parts of the business. In effect a partial or whole auction will deliver value materially in excess of the current price. In recent days we have been adding to our position in our Global Macro Fund.
The valuation of the company consists of the sum of all of the parts so let’s dig a little deeper. .. Blackberry is a technology company and one of relatively long standing; over the lifetime of the business Blackberry has built up a considerable portfolio of patents and in fact it has some 5200 active patents with a further 3000 plus applications within the wireless communications space. Readers may recall that the Nortel Networks portfolio of 6000 wireless patents sold for US$4.5 billion in 2011, somewhat ironically to a consortia that included Blackberry. Nonetheless, most analysts concede that even a conservative fire sale valuation of the Blackberry portfolio would place a valuation of US$ 2.5 billion on it.
Perhaps the hardest part of the business to value is the blackberry eco system that is its software for secure email and messaging services. True, Blackberry’s customer base is small in comparison to that of over the top providers such as ‘What’sapp’, but remember, the company made its name in the enterprise solutions business and, as we suggested in our previous article, Blackberry could offer organisations a one stop cross platform communication solution in the age of the Bring Your Own Device workplace.
Blackberry has around 55 million users of its messaging services and if we suggest a one off valuation of $40 per user (based on US$10 per customer per quarter which is broadly in line with Blackberry’s ARPU (Average Revenue per User), then we can pencil in a value of US$2.2 billion. Again, this is conservative.
In summary then, we can easily get to valuation of around US $8 billion including the case pile. That would imply a exit price of around US$16.00. However, as we flagged at the beginning of the article, the market has not been generous with its valuation. Million dollar question is – is the market being unduly pessimistic and is Blackberry destined to go the same way as Palm?
The benchmark bid premium for an entire company is around 30% (although this went out the window in the recent ENRC “steal”). Personally we don’t subscribe to this route off the market at Titan and, as relayed earlier, expect that an approach for the key operating system QNX or the messaging side or indeed the patents from a few parties will likely prompt Prem Watsa or another PE player to break cover and look to structure a break up bid. If this comes to pass we would expect an eventual exit level of anywhere between $14-18.
Interestingly for those of a technician’s slant, the lower price nicely coincides very closely with the top edge of the gap left behind on the 28th of June this year at $14.28 (see chart below). Of course these are ball park figures but they do seem to make sense on a number of levels.
Having established a realistic exit price we need to consider who might prepared to pay it?
Prem Watsa
Amongst the front runners at the moment is the Canadian entrepreneur Prem Watsa – best known as the man behind Fairfax Financial, Mr Watsa, who recently resigned from Blackberry’s board, has been touted as leading a Canadian buyout group which might include private equity and Canadian pension funds that have a history of active participation in takeover deals.
Of course a trade sale is also a distinct possibility Seattle based Microsoft which is cash rich but has never made a success of the mobile space, despite several attempts, is seen as likely to at least cast an eye over Blackberry and may certainly see value in its eco system and market penetration. Remember that Microsoft bought rival messaging service Skype for $8.5 billion back in 2011 but has yet to significantly monetize that acquisition. Might Blackberry’s software service be the missing piece of that jigsaw?
Nor are buyers likely to be contained to North America, Chinese groups such as Lenovo and Huawei may well throw their respective hats into the ring and have been mentioned on numerous occasions in the past. They may face a tough time however convincing authorities in Canada and the US that there are no national security issues but given recent revelations about the activities of the NSA, any objections raised on that score would have a hollow ring to them.
We must not discount interest from South Korean giant Samsung too who would probably like to move away from the generic and Google owned Android platform and establish its own mobile phone benchmark / operating system, if it could do so economically. Smaller rivals LG might also be a contender as could half a dozen US buyout groups such as Silver Lake Partners, though many of these will be waiting to see if a successful resolution to the buyout bid for PC maker Dell can be obtained before committing. Nor can we discount the intervention of US hedge funds and corporate raiders if they smell the opportunity to make money in Blackberry as we do.
Richard Jennings, CFA. Titan Investment Partners
Clear disclosure – Titan holds a position in Blackberry and the editor of this piece does in his personal capacity.