What does Microsoft’s purchase of Nokia mean for Blackberry?

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The cat was well and truly thrown amongst the pigeons this last week when Microsoft announced it was to purchase the mobile phone hand set business of Nokia for a total consideration of USD7.5 billion in a deal that is expected to close in early 2014. 

The deal itself was not the surprise, after all a combination of the two groups had been mooted since former Microsoft executive Stephen Elop joined the Finish group as CEO back in 2010. The conviction that closer ties between the two were  inevitable grew stronger when Nokia abandoned its proprietary software systems Symbian and Meego, in favour of Microsoft’s Windows Mobile platform back  in Feb 2011. Since when Nokia has become the principal manufacturer of Windows Mobile devices.  

It was however the timing of the announcement that caused a stir because there had been no hints whatsoever that a deal was in the offing despite recent news flow from both Nokia and Microsoft. Eyebrows were raised at what appears to be a relatively “mean” valuation for a business that was once Finlands flagship and the envy of the world. 

However  having nailed  its colours to the Windows mast Nokia had few alternatives in terms of partners and therefore Microsoft could, within reason, name its own price. 

The details of the deal are that Microsft is buying the handset manufacturing business for just over US$5 billion and is licensing certain of Nokias patents and applications for ten years for an additional $2.1billion. Rather tellingly, Microsoft  is also lending Nokia $1.5 billion (repayable on closure of the acquisition) – presumably to provide short term liquidity to the troubled Finnish company. How the mighty have fallen… 

Blackberry shareholders will have looked on yesterday with a mixture of envy and nervouseness, envy because a deal has been done in the mobile handset space that did not include them. Yet. And nervousness because the value placed on Nokia’s handset business was  not overly generous. 

Readers may recall that back on the 19th of August we wrote about  who the likley buyers for Blackberry might be and what exit price shareholders might expect to receive. We arrived at conservative valuation of $14 per share. 

It maybe a coincidence and its certainly not the conventional way to value a company but if we take the $7.5 billion purchase price paid by Microsoft for the Nokia handset business and compare it to Blackberrys current market cap of US $5.35 billion, we find that one divides by the other by  1.4 times… 

If  we now  multiply Blackberrys closing price of US$10.21 (the stock was up by 0.89% on Tuesday)  by that factor of 1.4 we arrive at a price of US$14.29.

Of course these are just real back of the envelope calculations and are not to be relied on in any analysis, indeed our own analysis on Blackberry has taken account of its entire balance sheet and potential EB multipes relative to similar deals in recent years but still, they do serve to show that our our original thinking was and is likely in the right ball park. 

Many column inches have been devoted to relative valuations of the two groups  (Nokia andBlackberry ) but to my mind a piece by Elephant Analytics (an independentanalyst based in the USA) was amongst the most interesting and timely. 

In essence the Elephant believes that Blackberry is in a superior position to Nokia  because of the higher revenues/margins generated by the Canadian group relative to Nokia. The Elephant points out that much of Nokia’s handset traffic was driven by less profitable entry level versions of their Windows phonesand that users spent aproximately 43% more on Blackberry handsets compared to Nokia purchases. Also, Blackberry is only now just transitioning itself fully into the new Blackberry 10 ecosystem, whilst Nokia has had two years of operation under Windows Mobile. 

Clearly an execution risk remains for Blackberry but perverseley Nokia coming under direct control of Microsoft might actually work in Blackberrys favour over the medium term. I say that because Microsoft has a very poor track record  when it comes to producing hardware  and can really only point to one success  in the shape of the Xbox  gaming console.  Its not impossible that in absorbing Nokia they will suck the life  and  remaining innovation out of the company and that this will benefit competitors such as Blackberry. 

However, in truth, Blackberrys strength and key point of differentiation is not in the commoditised world of handset manufacture but rather in its  unique software and its ability to offer secure messaging and online communcation solutions across an entire enterprise. Interestingly,  I note that a leaked video has surfaced on line this week that shows a demonstraion of Blackberrys much anticipated BBM app for Android and which should allow the company to monetise its software away from  its own handsets for the first time. That business model could well be the road map for the company going forward. 

Furthermore Blackberry has cash of more than US$3 billion currently (equivalent to more than half of its market cap as of the close on 05/09/13) Blackberry also has  little or no debt and has many thousands of patents under its belt. 

True the stock price has fallen back from the mid August peak when takeover speculation was at its height but this weeks news shows that there is certainly an appetite for consolidation within the sector. We can expect sentiment towards Blackberry shares to swing around over the coming weeks as the auction/sale process comes to an end. The $10.00 level is presently providing solid support and with the 50 day EMA line around $10.64 a weekly close above here on good volume will certainly give the shorts something to think abour.  We continue to believe that patience will be rewarded with this stock and we are only in the opening few rounds of ther contest to use boxing parlance. 


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