BlackBerry: Spinning BBM Into Facebook

| About: BlackBerry Ltd. (BBRY)

The release of the new BlackBerry Messenger Service has occurred. Regardless of whether you are a BlackBerry bull or a BlackBerry bear, the launch of BBM on Android and iOS has the potential to act as a catalyst. Time will tell how the industry will respond to the new enhanced messaging system. As BlackBerry (NASDAQ:BBRY) continues the search for potential buyers, I have been asking myself who would be interested in BBM. On the surface, Facebook (NASDAQ:FB) would appear to be a less than likely suitor; yet, upon closer analysis, Facebook would be the most logical choice. I am aware of the recent news article stating that BlackBerry executives have met with Facebook in California, and arrived at my thesis a few days before. This recent information illustrates that there is some realistic interest from Facebook. While I am more pessimistic than I was in my previous BlackBerry articles, I feel there are still a few cards to play.

BBM as separate division

Recently, BlackBerry has announced the creation of a new division that will be solely responsible for BBM. Andrew Bocking is the new head of the BBM division and has been with BlackBerry during the glory days. Hopefully this is a positive, as maintaining the BBM prestige is paramount. It is my belief that this may be part of the bigger picture, which allows BlackBerry to sell various divisions to qualified buyers.

iOS and Android apps

Within the first day of BBM's release for iOS and Android, there have been 10 million downloads. Normally, identifying the number of downloads would be heavily criticized for not reflecting qualified users; yet, due to the stringent user requirements, this is not the case. Only devices that have mobile cellular capabilities can utilize the BBM application. Upon installation, a user account is created that is linked to the IMEI number of the mobile device. This IMEI number is a unique number, allowing a unique PIN on the BBM network.

There have been a few reviews with low rating scores; upon close inspection, most of the negative reviews were about the mandatory waiting period. Since this was purposely implemented by BlackBerry for infrastructure reasons, these reviews should be discounted.

As of today, the Globe and Mail is reporting that there are 20 million new BBM users, and they are active. Active is being defined as using the service at least once.

Subscribers

BBM subscriber count should increase rapidly with the availability on the iOS and Android platforms. While increased BBM subscriber counts do not add directly to top line revenue, I believe there will be an intangible benefit. BlackBerry as a whole is no longer providing subscriber numbers, but the newly created BBM division may independently report subscriber numbers. Of course, this would be dependent on positive results.

Security

One of the advantages that BBM has over other messaging systems is security. Since the revelations about the National Security Agency "spying" on member states and citizens, security has been a concern. I do not know or have any information that would suggest that BBM cannot be hacked, but what is known is that BlackBerry's messaging system is more secure than most. For companies such as Facebook, developing a comparable system would be costly, and more importantly, time consuming.

Monetization

On the mobile platform, making money is in its infancy. Many companies are exploring various techniques that would increase top line revenue numbers. Facebook is seeing an increase in mobile ad revenue, with mobile ad revenue accounting for nearly 30% of all ad revenue in their 1st quarter. With more revenue being realized in the mobile space, BBM's value is elevated as a growth sector. Many start-ups have been acquired with smaller prospects and higher P/E multiples. The true value of the BBM division is what the market bear, and only time will tell.

Outside of the traditional BBM features, there are many features in the beta testing pipeline that may be of value to companies like Facebook . BlackBerry has integrated BBM with a new system called "BBM Channels". This system looks like an amalgamation of Twitter and Facebook. I won't go into the details, as I already wrote an article called "BlackBerry Thinking Ahead With BBM Channels".

Facebook's smartphone

This year saw Facebook partnering with HTC to provide a Facebook branded mobile phone called First. The phone never gained much traction, and it became clear that Facebook was testing the market. I do not believe that Facebook would be interested in BlackBerry's handset business, but may consider it if the price is right. It is foreseeable that Facebook could utilize the BBM integration with the handset, and the infrastructure to build out Facebook's data centers. The build out would allow for tighter integration in Asian markets, where historically BlackBerry has been strong. BlackBerry has also been experimenting with other technology such as mobile payments with Visa (NYSE:V). In an ever changing environment, Facebook could find a competitive advantage with some of BlackBerry's technology.

Valuation

Currently, Prem Watsa of Fairfax Holdings (OTCPK:FRFHF) has a preliminary offer at $9 / share or $4.7 billion. Using this evaluation, Facebook could better this offer for the whole company with a bid of $5 billion. According to Facebook's balance sheet, cash on hand is approximately $10.25 billion with a total debt of $2.17 billion. This leaves a net cash balance of approximately $8 billion. Obviously it would be highly improbable to spend $5 billion, leaving only $3 billion left for Facebook.

It is important to note, that BlackBerry has been booking losses recently. This has the advantage of cleaning the books and making the company more attractive for a takeover. If most of the losses have been booked, it may be to Facebook's advantage to buy the whole company, as BlackBerry's cash on hand and other assets can discount the purchase price. It may even be cost advantageous, with just closing various aspects of BlackBerry's divisions. It has been heavily reported that BlackBerry has between $2 and $3 billion cash on hand, but currently, it is unclear the amount of cash on hand due to all the accounting changes that have occurred. Yes, BlackBerry has even changed the way it counts sales of handsets, and the numbers are distorted. Only completing due diligence by accessing BlackBerry's books will reveal the whole picture, and unfortunately for the retail investor, this is not possible.

Conclusion

I do not want to see BlackBerry acquired, as I feel there is significant value in the business that is not yet realized. It is possible that it may take a company like Facebook to unlock this value. But, I don't want to see Facebook integrated with my car via QNX, reporting on my timeline all my driving habits.

While there appears to be little room for handset companies in this market, it would appear that there is room in the social space. Ideally, BlackBerry could carve out a niche in this space, but with time running out, the prospects look bleak.

Disclosure: I am long BBRY. 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.