Take Advantage Of BlackBerry Pessimism

| About: BlackBerry Ltd. (BBRY)

Ever since the BlackBerry (NASDAQ:BBRY) BOD announced that the company was up for sale, there has been a lot of speculation if Fairfax would actually come up with the financing to complete the buyout. As per the fact that there was no deal, we have to assume that the financing did not come through.

Instead of a takeover from Fairfax or a bid from a third party, BlackBerry announced that several institutional investors will invest $1 billion in BlackBerry via a private placement of unsecured subordinated convertible debentures. The debentures pay a coupon of 6% and can be converted to BlackBerry shares at $10 a share, a 28.7% premium to the prior day's close. If converted, the debenture holders would own 16% of BlackBerry's common stock.

While a 28% premium is a bullish sign, the market did not see it that way. In Alcatel-Lucent's (ALU) case just a few days ago, where the placement was done at a steep discount that cost shareholders a 20% dilution, the market took it as a bullish sign. In BlackBerry's case, where the placement was done at a good premium, the market sold the news. Go figure.

BlackBerry's stock was down as much as 20% on the news; however, I think this was much anticipated if the deal would fall apart (as it did). Also, the fall in the stock might be attributed to the dilution to current shareholders. But then again, looking at Alcatel-Lucent, one can never tell.

One question is, why did BlackBerry issue this debenture? I do not think they need money, at least not according to the company's last balance sheet statement. And even if we do see more inventory write downs, as Redrut pointed out, this would be a non cash charge. So even if BlackBerry burns more cash, it will be much less than any reported losses, as was the case in the previous quarter.

My guess is that the $1 billion debenture is simply a gesture of trust on behalf of Fairfax and all those who were interested in BlackBerry, but for some reason could not bid on the company (I am speculating Lenovo might be one of the other debenture investors).

One interesting thing about the debenture is that it offers no guarantees to investors. It is both unsecured and subordinated. In essence, those who will invest $1 billion in BlackBerry will have no guarantees. So if BlackBerry goes out of business, then the holders of the debentures have nothing. But then again, BlackBerry has no debt on its books, so there are no creditors to be subordinated to. The loan is also not secured by any assets, so it is probably safe to assume that the investors don't think there is much risk.

BlackBerry also announced that its new CEO would be John Chen, the one time CEO of Sybase who managed to turn the company around and sell it later to SAP for $5.8 billion. In a Reuters article, he estimates that it will take about six quarters to turn BlackBerry around and he also sees no need to get rid of the device division.

Finally someone understands that you can't sell BlackBerry in parts without changing the character of the company. As I have said in the past, BlackBerry is worth more together than the sum of the parts. The reason for is that BlackBerry has no non-core holdings. Every individual component of the company makes it what it is, and selling any one part, will change its DNA.

Bottom line

While the $1 billion debenture is more of a confidence vote for BlackBerry than anything else, nevertheless, it will provide a cushion of capital in case it actually needs it. I don't think it will be needed, but we will see more about that in the company's next quarterly report.

The old guard is out (thank god) and the company has hired a new CEO, who at least has a proven record of turning companies around, because he has actually done it before.

As I see it, this company is not going out of business, even if device sales keep falling (something I doubt and I will have a special article on this topic later this week). Government and enterprise customers who want the maximum security will continue to be BlackBerry's customers.

When BlackBerry does stabilize and the market sees that the company is not going under, I think we will see a lot more companies committing to BlackBerry devices and services, especially now with BlackBerry's cloud offerings.

While we will need to get more feedback about John Chen's turnaround strategy, the fact that BlackBerry now has a new CEO and that he plans on bringing many more new executives into the company, means that this time the turnaround effort is on a more serious note than in the past.

As for the stock, while it is my biggest disappointment in years, I still do not share the market's pessimism for the company, and continue to think this stock can give investors extraordinary returns over a period of several years, assuming of course that there is nothing serious going on with the company that we might not be aware of.

And given that I do not see this company going out of business, and if we assume John Chen steers BlackBerry in the right direction, then lower one buys the stock, the more he will make if the turnaround is successful.

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.