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BlackBerry Ltd (BBRY) Fundamentals Deteriorating

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BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) revealed recently that a Fairfax Financial Holdings Ltd (TSE:FFH) led consortium, which earlier intended to buy the Canadian smartphone maker for $9 per share, has decided not to take the Canadian firm private. A letter of intent was signed between both companies on September 23.

BlackBerry Ltd (BBRY) Fundamentals Deteriorating

Now BlackBerry will raise $1 billion through a private placement of convertible debt in which Fairfax will contribute $250 million.  The debenture will pay 6% over 7 years and is convertible at U.S. $10 per share.

Fairfax now “effectively” in control now

Analysts Deepak Kaushal and Angelica Uruena at GMP Securities note that disappointment from the side of the strategic buyer suggests that the “fundamental deterioration of the business is accelerating.” Also, according to the analysts, Fairfax CEO Prem Watsa was made the lead director, which indicates that Fairfax has “effectively taken control of the Board and secured protection ahead of equity in a downside scenario, while still retaining the possibility of upside (an unlikely scenario in our view).”

Chen favors turnaround, not spin-off

BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) also announced that John S. Chen will become the new executive chairman and interim CEO of the company. Chen is the man behind the turnaround of enterprise software company Sybase in the late 1990s. He is focused on the turnaround of the BlackBerry business rather than spinning off its different arms.  Analysts believe that BlackBerry will be transformed into a “smaller niche” software and services company, but the transformation of the company involves high risk in the wake of decline in profitable service fees.

BlackBerry may be subjected to further restructuring and cash investment before the company acquires stability and sustainability. There is no idea, as of now, what steps Chen will take to turn the company around, according to analysts.

BlackBerry continues to post losses

GMP Securities analysts have lowered their estimates for BlackBerry, citing subscriber defections, continued slow uptake of BB10 hardware, and rapidly declining service fees and associated gross margins as legacy BB7 service fees end. For fiscal 2015, hardware shipment is expected to come down 53% year on year to 10 million. Subscribers are expected to come down 48% year on year to 26.7 million. Analysts are estimating continued losses through fiscal 2015 and cash burn of $597 million.

Analysts believe that the subscriber base along with profitability will keep on dropping even though the company is injecting $1 billion through private placement. Analysts have reduced the price target for BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) to U.S. $4.

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