BlackBerry Is Worth $15 Dead Or Alive

Sep. 4.13 | About: BlackBerry Ltd. (BBRY)

The resignation of Prem Watsa from the board of directors and the departure of key executives at BlackBerry (NASDAQ:BBRY) could clear the way for the strategic alternatives. While a complete sale of the company would put an end to the nightmare shareholders have endured over the last four years, there are still alternatives that keep BlackBerry largely intact. Looking at the value of individual parts, I think the shares could be worth a 50% premium in either scenario.

Exploring 'strategic alternatives' again

The announcement by the board follows last year's attempt, also through JPMorgan (NYSE:JPM) to look for a way to stop losses that have plagued the company ever since the launch of the iPhone. Last year's search undoubtedly ran into management hopes for the new operating system and devices.

I think BlackBerry is further along in the process of finding a solution than what has been revealed to the market. I doubt that the bankers at JPMorgan have any new options than were discussed last year. It is interesting that the company has hired only JPMorgan this time instead of both JPMorgan and RBC as was done last year. What has changed is that management now has fewer organic options and must accept outside solutions. Managers may not get as much as what might have been offered last year, but they may be ready to settle for what they can get.

But just how much could shareholders see in an offer?

Worth more for its parts

While much of the market has completely written off the company, I think there is still a chance for it to survive. The lack of enthusiasm for Z10 was devastating and the Q10 has been a disappointment but the company still has a chance in the enterprise space. Enterprise users, the company's historical strength, are slower to approve new devices so the news could still be good for the new handsets.

Hardware accounted for 60% of total revenue in fiscal 2013 but accounted for 92% of the cost of sales, leading to a loss for the segment. The segment is clearly the weakness for the company and the best solution may be to sell the hardware division while keeping the other segments. Services and software brought in $4.2 billion, 38% of FY13 sales, with cost of sales of $579 million.

The company had 3% of the U.S. smartphone market as of the second quarter this year. That's down from 9% in the year prior but the company still managed to ship 32.5 million handsets last year. The subscriber count fell to approximately 76 million in FY13 and will probably fall further this year.

The company has significant value in emerging markets with revenue from Latin America accounting for 19% of total sales in 2013, compared to just 14% in the prior year. The company has seen its ex-North American revenue increase to 74% of total sales in 2013 versus just 53% in 2011.

There is definitely value in BlackBerry but it is unlikely that any one company could benefit by buying the entire company.

Among the list of possible buyers, none really needs every segment of the company for its overall strategy. International Business Machines (NYSE:IBM) could use the intellectual property and enterprise services but really does not need the hardware or software segments. The hardware segment could help a company like Facebook (NASDAQ:FB) monetize its own mobile services but enterprise services would not be worth as much.

What's more likely is that a private equity firm, or another buyer, would take the company private to restructure and sell the assets to companies that could more efficiently use each segment. This would leave BlackBerry essentially dead as a company in itself but with the pieces and the brand living on.

The most obvious buyer would be a buyout by FairFax Financial, owner of almost 10% of the shares. In the announcement last month, CEO Prem Watsa voiced his continued support of the company and said that FairFax had no intention of selling its stake. Watsa resigned from the board of directors due to, "potential conflicts of interest that may arise during the process," leading me to believe that that FairFax may be interested in bidding for all or part of the company.

A sum of parts valuation makes the most sense

Because we really do not know who might emerge as a potential bidder for the assets, a sum of parts valuation is helpful to find how much the company could be worth if broken up and sold in pieces.

The table below shows a possible valuation for company assets minus liabilities that would need to be paid in the event of a breakup. Assuming a strategic sale takes much of this year to finalize, I estimated the respective values for the end of FY2014. Each line was given an initial value as reported in first-quarter 2014 and adjusted for the end of year according to notes on the right.

Segment valuations are for a multiple of one-times gross sales, possibly a little low given the premium they might be worth to someone who can utilize the individual segments. I am expecting a cash burn for the year between $500 and $800 million, so the midpoint was taken as an estimate. Most assets were discounted for a quick sale except receivables since it is already recorded net of uncollectables.

Purchase obligations of $6.0 billion account for the majority of liabilities that will need to be paid. My estimate of $3.9 billion remaining and to be paid at the end of the year may be high depending on actual contracts. A buyer of the hardware segment may renegotiate some of the supplier contracts and pay a portion of the remaining balance.

Blackberry Breakup ValuationClick to enlarge

To maintain its existence, the company would have to sell off the unprofitable hardware segment and restructure the other segments. This would have to involve a transfer of some of the purchase obligations with the remaining contracts to be negotiated and paid.

Blackberry income ex-hardware

After selling off the hardware segment, the income statement for BlackBerry could show an EBITDA of $1.3 billion and a value of just under $15 per share given an EBITDA multiple of six times. This is assuming that the company can keep cost of sales around 15% and can lower operating expenses to around 50% of total sales.

Either alternative could be a viable option. The company has no long-term debt, which could give it the financial flexibility to sell the hardware segment and pay off some of its purchase obligations without burning through all its current assets.

Find a greater fool

Investors looking for a long-term entry into the shares have been disappointed over the last several years. The stock has rebounded sharply on hopes for a turnaround only to fall again and hit new lows. Short interest in the shares has ballooned to more than 31% of the float. Any strategic announcement that removes the uncertainty of a total loss is likely to cause many of these shorts to head for the exit. Combined with new interest in the company, this could send the shares surging higher very quickly.

The renewed hope for a strategic alternative means that downside from $10 may be limited so I think you can buy into the shares and wait for a catalyst. Given the uncertainty even after an announcement, I would not wait for the shares to reach their $15 potential. I think sentiment and any rumor of an announcement could push the shares to $13 a piece and provide a nice return without having to stick around for execution of a plan. Option strategies like a bull spread may offer higher returns but carry a time horizon as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.