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Over 12 years of professional experience in capital markets and strategic consulting. Since 2003 decision-maker in respect of the whole listing process of small and mid-sized companies with focus on Equity Capital Markets and Private Equity Advisory. Superior network to national as well as... More
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  • BlackBerry – A Bitter Mistake

    Rise and Fall

    The Company was incorporated under the Business Corporations Act (Ontario) ("OBCA") on March 7, 1984 and commenced operations at that time. It revolutionized the mobile industry when BlackBerry® was introduced in 1999. Today, BlackBerry aims to inspire the success of millions of customers around the world by continuously pushing the boundaries of mobile experiences.

    Five years ago, almost 90 percent of revenues have been generated by selling devices. For the three months ended August 31st 2013, Hardware revenue was $770 million, or 49.0% of consolidated revenue, compared to $1.7 billion, or 59.8% of consolidated revenue, in the second quarter of fiscal 2013. While revenue peaked in 2011 with almost 20 billion USD in sales, BlackBerry will hardly reach 10 billion USD in the fiscal year 2014.

    "We are very disappointed with our operational and financial results this quarter and have announced a series of major changes to address the competitive hardware environment and our cost structure," commented Thorsten Heins, President and CEO of BlackBerry.

    Current Restructuring

    As a consequence, the Company announced on August 12, 2013, that the Board of Directors had formed the Special Committee to explore strategic alternatives to enhance value and increase scale in order to accelerate BlackBerry 10 deployment. As part of the operational restructuring, BlackBerry plans to reduce its feature smartphone portfolio from six devices to four, including two high-end devices and two entry-level devices in all-touch and QWERTY models.

    The Special Committee has engaged in a process to review potential alternatives, with the assistance of its financial and legal advisors, which include possible joint ventures, strategic partnerships or alliances, a sale of the Company or other possible transactions.

    Furthermore the Company announced that it intends to implement a workforce reduction of approximately 4.500 positions, or approximately 40% of the Company's current global workforce, resulting in a total workforce of approximately 7.000 full-time global employees. This would set back BlackBerry in the year 2007 when it gratefully employed 6.000 employees "whose talents and dedication enabled RIM to… achieve its goals and deliver strong financial performance for shareholders."

    Rookie Mistake

    BlackBerry, the once beloved plaything for businessmen and stars, lost market share to Apple & Co. in a painful way. Maybe even more painful, at least for shareholders, is the way its Special Committee tried to catch the straw Canadian Fairfax, led by Prem Watsa, might or might not offer:

    On September 23, 2013, the Company announced that it had signed the LOI with Fairfax Financial Holdings, under which the Fairfax Consortium has offered to acquire the Company subject to due diligence.

    The LOI contemplates a transaction in which the Company's shareholders would receive $9 in cash for each common share of the Company they hold, in a transaction valued at approximately $4.7 billion. The Fairfax Consortium, which is seeking financing, would acquire for cash all of the outstanding shares of BlackBerry not held by Fairfax. Fairfax, which owns approximately 9.9% of the Company's outstanding common shares, intends to contribute the shares of BlackBerry it currently holds into the transaction. The Board of Directors, acting on the recommendation of the Special Committee, approved the terms of the LOI.

    The parties expect the Fairfax Consortium's due diligence to be completed by November 4, 2013 and their intention is to negotiate and execute the Definitive Agreement by such date.

    My question: How could BlackBerry approve this LOI and thereby accept this offer so easily? This clearly creates a cap for all the other companies that might be interested. Such as Cerberus, Lenova or all the others (Cisco, Google, Microsoft and SAP) that are reportedly have an eye on BlackBerry as well?

    Let's recall that Fairfax and its chairman, Prem Watsa, haven't raised financing for the deal, and there's a chance they might fail to do so. Even worse, the firm's letter of intent includes a go-shop provision that entitles it to 30 cents a share, about 157.2 million USD, if BlackBerry attracts and accepts an offer better than the 9 USD per share Fairfax is offering. Thus, Fairfax, which doesn't yet have the money to acquire BlackBerry, will make millions if someone else does.

    On the other hand smart bidders might wait until Fairfax declines to conclude the deal early November and they simply will replace the 9 USD offer of Fairfax. Who is going to offer more than the Special Committee already accepted?

    Valuation

    Nowadays dozens of articles are published and they all repeat the same facts. But no one single article offers a deep look at the financials but that's what this article does.

    The market currently values BlackBerry with 4.4 billion USD. This is a price-sales-ratio of 0.44 assuming that BlackBerry will generate sales of 10 billion USD in 2014. In 2008, BlackBerry shares traded with a peak multiple of 10.2 on sales. But what is the multiple of its peer group?

    Some of the Company's main competitors include Apple Inc., Google Inc., Microsoft Corporation and Nokia Corporation. They are trading with multiples starting from 0.67 (Nokia) to 6.71 (Google). This would result in a price per share of 12.77 USD to 127.90 USD. While Google might not be the appropriate benchmark, Nokia is for sure.

    By the way BlackBerry itself might be the best example: In 2009 the company had 11.1 billion USD in sales and a market cap of 20.88 billion USD. The cash-position was almost the same and the net profit (we do not have one, yet), will return after the company has reduces its staff to 7.500 employees.

    As the valuation is definitely not too high, why the hell the management is so desperate to get a deal at 9 USD per share?

    The only way out might become a bidding competition and this is what I foresee for BlackBerry. The quotation shows us the way and I still believe in quotes significantly above 9 USD.

    Disclosure: I am long BBRY.

    Oct 21 10:35 AM | Link | Comment!
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