There has been a lot of talk recently about potential deals for BlackBerry (BBRY) with Prem Watsa or private equity companies taking BlackBerry private or perhaps BlackBerry being sold in an auction. As with most of the news around BlackBerry, there is a lot of conflicting information, so it is difficult to assess the chances of a deal and the level of interest in BlackBerry. In this article, we are going to focus only on the likely price that a BlackBerry deal will happen at, not the likelihood that such a deal will occur. We will approach it from two perspectives. First we will look at what an acquirer may be willing to pay for BlackBerry. Then we will look at what shareholders may be willing to accept.
Estimates of BlackBerry's Value
A recent Market Currents post on Seeking Alpha mentioned analyst ranges for the value of various parts of BlackBerry. We are going to look at the ranges here, and also determine the top end value of the hardware division, which was only given a cost for winding down in that post. Although that post was discussing a sale of BlackBerry's parts, we are going to use those figures for valuing BlackBerry as a whole.
As mentioned in the post, some analysts figure that it could cost as much as $2 billion to wind down the hardware business. Another number we have heard is BMO analyst Tim Long's estimate of a $800 million cost to wind down the business.
On the other hand, while BlackBerry's hardware business has struggled, an acquirer may have some ideas on what it can do strategically with the hardware division. In that case, a valuation close to Nokia's (NOK) mobile phone business would make BlackBerry's hardware business worth around $2 billion. This is based on 0.28x trailing year hardware revenues of $7.16 billion, compared to Microsoft's (MSFT) offer for Nokia's mobile devices division at 0.31x trailing year hardware revenues. Nokia's overall mobile phone business was consistently losing money and declining in revenues, but was showing significant smartphone growth and had a ready made suitor in Microsoft. Taking the midpoint of the high and low end estimates of BlackBerry's hardware division would give a value of $0.
Adding all of these parts together gives a low-end valuation of $11.64 per share, a midpoint valuation of $17.84 per share, and a high-end valuation of $24.04 per share. Of course, any acquirer would seek to make an offer for BlackBerry that is significantly less than this, but these values can be considered maximum amounts that an acquirer would be willing to pay.
If we were to take the midpoint values for all segments except hardware and the subtract $2 billion for winding down the hardware division, the value would be $14.02 per share. If the cost to wind down the hardware division was $800 million, then the value would be $16.31 per share.
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Historical Merger and Acquisition Premiums
The premium to acquire a company averaged around 25% in 2012, which was an 11 year high. While some acquisitions have commanded a much higher premium, those companies have usually been in high demand with no interest (or limited interest) in being purchased. As well, companies with lower market caps can command higher premiums due to relative affordability.
A 25% premium to BlackBerry's general trading range of $10 to $11 in recent weeks would put the value at $12.50 to $13.75 per share. This is a price that does not reflect that possibility that many BlackBerry shareholders value the company at much higher than current levels. Some shareholders may also have average costs that are higher than $12.50 to $13.75 as well, and may be reluctant to accept a bid in that range. To further assess how shareholder opposition may fare with a particular bid price, we are going to look at Dell's recent bid to go private.
Taking Dell Private
The recent bid by Michael Dell and Silver Lake to take Dell (DELL) private is instructive as an example of how shareholders value a company that has struggled recently, but is seen by some to have significant value that needs to be unlocked. Unlike BlackBerry, Dell has remained profitable, but both companies have healthy balance sheets.
Although Dell's share price decline wasn't as precipitous as BlackBerry's, it did fall 31% in 2012 and did not recover until rumors surfaced about the bid to take Dell private. Dell also faced resistance from shareholders who believed that Dell's stock was undervalued by the market and certainly worth more than Michael Dell's offer.
The final deal value of $13.88 per share represented a premium of 28% over Dell's share price of $10.88 on January 11, just before rumors of the bid to go private caused to share price to jump. This is also a premium of approximately 40% over the average closing share price during the previous three months before that point, a premium of 31% over the average closing share price during the previous six months and a premium of 7% over the average closing share price during the previous year.
Below is BlackBerry's average closing price over the past three months, six months, and full year. Alongside is BlackBerry's value incorporating the same premiums as the final Dell bid.
With Dell, the 40% premium over the average price during the previous three months was enough to convince 65% of shareholders to approve the offer despite significant opposition to it. The fact that the outcome was in doubt for a while before Carl Icahn bowed out appears at least partially due to Dell's bid representing only a small premium over the average closing price from the last year.
As for BlackBerry, it appears that a bid of around $13 to $16 per share would probably be enough to win a majority of the shareholder vote.
While it remains uncertain whether there will be an attempt to acquire BlackBerry in the next few months, it appears that a bid in the $13 to $16 range would likely have enough support to win the shareholder vote. This bid is also below the midpoint valuation of $17.84, so a potential acquirer who agrees with analyst assessments of BlackBerry's value would be willing to offer something in that range. If the potential acquirer wants to wind down the hardware division, the offer may be to the lower end of the range depending on the perceived cost to wind down the division. At a cost of $800 million, BlackBerry's $16.31 per share value would still be above the proposed range. At a cost of $2 billion, BlackBerry's value per share would be $14.02, perhaps leading to a bid that is at the lower end of the range, although the purchaser may also see some tax benefits from those costs.