BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) board announced today that it is considering a range of options including a sale of the company and/ or joint ventures. Board member Prem Watsa of top holder Fairfax Financial Holdings Ltd (TSE:FFH) (owns 13.6% or 51.8M shares) announced his resignation due to conflicts of interest and the company has hired JPMorgan Chase & Co (NYSE:JPM) to assist in the process.
Analysts at Evercore have upgraded BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) to EW from UW and have raised their PT to $10 ($8 previously). They consider the stock a “special situation” from here, which could result in the company going private or remaining as a standalone entity; if the latter analysts would expect the stock to resume its downward trend. Evercore Partner’s updated sum-of-parts analysis now yields $10, based on $2.2B or $4.13 in FY14 ending net cash per share, $1.9B or $3.58 in patents, and $1.2B or $2.32 for BlackBerry’s recurring subscriber base, with zero value attributed to BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s hardware business.
The biggest stores of value in analysts’ view include 1) BlackBerry’s patent portfolio of ~11,000 patents, which they believe could fetch ~$1.9B or $3.58 per share in a sale, 2) BlackBerry’s declining BES/NOC platform with ~72M subscribers currently paying ~$3.60 per month in service fees which analysts assign a terminal value of $1.2B or $2.32 per share based on 30M die-hard subs generating ~$162M of EBITDA, and 3) net cash of $2.2B or $4.13 per share. They have long argued that an “open” approach to BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s recurring subscriber business in which they support Apple and Android could salvage the value, but the focus on the BB10 hardware solutions has cost the company valuable time as third party open MDM solutions have gained traction.
BlackBerry’s press release included few hints
What could private equity or a strategic buyer do differently? BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s press release included few hints, but analysts think new ownership could result in possibly quicker monetization of BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s strategic assets in the form of a split of the BB10 hardware business from the recurring services. This makes sense as the two divisions create a conflict as Apple and/ or Android device manufacturers would be slow to support an open BES platform as they compete head to head in hardware. Negatives to new ownership include the operational risks inherent in a fundamental turnaround, management distraction, and key employee retention.
Left to its own with no strategic change, analysts expect further deterioration of BlackBerry’s fundamentals. As Evercore’s previous Underweight rating has indicated, they see little upside to a standalone scenario. Outside a strategic change, analysts see BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s August report in late September as the next fundamental catalyst.
BlackBerry’s recurring subscriber base
Private equity or a strategic buyer could unlock more value from BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s recurring subscriber base. Evercore Partner’s terminal valuation analysis contemplates 30M (down from ~ 72M currently) die-hard Blackberry subscribers paying $3 per month for $1.1B in annual sales at 15% operating margins. They could see a buyer taking a more optimistic view and leading to a potentially higher bid through a break from BBRY’s hardware business and thus lead to successful deployment of an open solution which supports both Android and Apple Inc. (NASDAQ:AAPL) devices. Analysts note every 10M users versus their 30M forecast could add ~ $0.75-$1.00 in valuation at a 10x multiple on taxed earnings. In their view, the company must move quickly however as third party MDM (Mobile Device Management) solutions from private companies AirWatch, Mobile Iron, as well as Citrix are rapidly displacing BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) in the enterprise.
BlackBerry Faces ever-present competition from Android and Apple
Private equity / strategic buyer negatives. Analysts aren’t aware of the price and/or the terms of a strategic transaction, and they note that such a transaction could actually come at a discount rather than premium to the public market value of the shares. Any privatization process could distract the current management team from its in-process turn-around attempt and result in turnover of BBRY’s employee base. They also note BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) faces ever-present competition from the Android and Apple ecosystem and thus the true value for BlackBerry’s handset division could actually prove negative.
BlackBerry patents still valuable, particularly in a “split” scenario
Analysts estimate ~ $1.9B or $3.58 per share in value for BlackBerry’s 11,000 patents. This could play out should BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) split its hardware and services businesses under private ownership – thus BBRY could monetize its patents should the company de-emphasize its hardware business. Patents are only worth what a third party might pay for them – in this case, the “patent bubble” which yielded a premium $4.5B paid for Nortel patents in July 2011 is history, but again, analysts note that they would not be surprised to see similar valuation work by a new owner.