The Party Is Over For Chen, BlackBerry

| About: BlackBerry Ltd. (BB)
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John Chen's honeymoon at BlackBerry is over.

A recent T-Mobile spat has further exposed BlackBerry's weakness within the consumer marketplace.

BlackBerry stock should be sold and avoided.

On November 4, 2013, John Chen was appointed as Interim Chief Executive Officer and Executive Chair of the BlackBerry (BBRY) Board of Directors. The BlackBerry team immediately played up Chen's work as Chairman and CEO at Sybase, where he transformed a "slower-growth technology company into a $1.5 billion-plus high-growth innovator." The implication, of course, was that Chen would promptly install similar techniques to restore the BlackBerry brand back to glory. At that time, BlackBerry stock traded for $6.50 per share, which also calculated out to a mere $3.4 billion in market capitalization. Wall Street traders had once valued BlackBerry at approximately $85 billion during its 2008 heyday.

Over the next quarter, BlackBerry shares were to establish intermediate-term highs at $10.78 and $10.60 in late January and February. Misguided BlackBerry bulls may have then theorized that Chen's broad plans to sell off real estate, streamline product, and build around the QNX "crown jewel," were being rewarded accurately via surging share prices. The Chen premium, however, was largely the work of speculators and short sellers caught up in a squeeze. On April 2, 2014, Chen and BlackBerry came crashing back down to earth, after announcing plans to allow a long-running licensing deal with carrier T-Mobile (NASDAQ:TMUS) to expire later that month. The consumer electronics community barely even noticed.

Thanks, But No Thanks

The aforementioned move to award Chen the Interim CEO title may actually be interpreted as a concession of defeat at Waterloo. In 2012, BlackBerry hired investment banks RBC Capital (NYSE:RY) and JP Morgan (NYSE:JPM) to perform a strategic review of the telecommunications company. At that time, CNN Money defined the term strategic review as "corporate jargon for putting a company on the block." One year later, Fairfax Financial and a group of institutional investors signed a letter of intent to offer $9 per share, or $4.7 billion, for BlackBerry. The September 23, 2013 letter of intent granted the Fairfax-led consortium 6 weeks to perform due diligence.

Several weeks later, panicked investors were to dump BlackBerry shares to an ugly 16.3% loss on the November 4, 2013 trading session. In retrospect, identifying Chen as CEO was somewhat of an adjunct to the real news. The strategic review period had come to an embarrassing end. No third-party takers emerged to buy BlackBerry, while Fairfax was unable to secure financing to close out the aforementioned letter of intent deal. Be advised that Fairfax Financial then owned a near 10% stake in BlackBerry as the company's largest shareholder. Fairfax and its consortium of institutional investors, of course, was to also announce that it was set to take down $1 billion in BlackBerry convertible bonds on that November 4th. Last January, Fairfax was to actually add another $250 million to this investment position.

Terms of the debenture agreement grant rights for the Fairfax consortium to exchange bond principal for BlackBerry stock at $10 per share. The full conversion of $1.25 billion in debentures would therefore add 125 million outstanding shares to the BlackBerry balance sheet. As of March 1, 2014, BlackBerry listed 526.6 million shares issued on the books. BlackBerry shareholders are therefore at risk of severe 23.7% ownership dilution. The talented Chen now finds himself already behind the eight ball and losing out to an impossible situation.

T-Mobile Spurns BlackBerry

Last February, T-Mobile fired its own opening salvo into the Waterloo camp, after targeting its in-house BlackBerry customers with a special Apple iPhone offer. The T-Mobile mailer announced that BlackBerry customers could then purchase an iPhone 5S for no money down. The new iPhone owners would be granted two years of time to pay off the 5S purchase at $25.00 per month ($600.00 full retail price). T-Mobile's BlackBerry customers who migrated over to the iPhone 5S would not be locked into an annual service contract. T-Mobile then pitched the iPhone 5S as an upgrade above the BlackBerry product line, while the carrier also associated the Apple brand with "powerful communications and productivity apps." Going forward, customers who abruptly cancel wireless service, of course, must immediately make good upon their remaining T-Mobile iPhone 5S balance.

The iPhone 5S offer did set off the inevitable war of words between BlackBerry and T-Mobile camps. John Chen promptly attempted to dress down T-Mobile, while also rallying his battered BlackBerry troops. In his February 18 letter, Chen fed upon the "outrage" out of BlackBerry customers, employees, and investors, to go on the attack against T-Mobile. Chen went on to rip T-Mobile for its apparently "inappropriate and ill-conceived marketing promotion." T-Mobile, however, had not offered any BlackBerry handsets within its physical stores over the past year. T-Mobile has only made the BlackBerry Q10 available online for $528, which may be paid off in $22 monthly installments over two years. Interestingly, T-Mobile was to retaliate against Chen's tough talk with another $200 gift card offer to customers who traded in their BlackBerry phones for Samsung handsets.

If anything, John Chen has unwittingly painted BlackBerry into a corner as a jilted and bitter former lover. On April 4, 2014, research firm comScore (NASDAQ:SCOR) released its report for February 2014 U.S. smartphone subscriber market share. Be advised that the title of the report is somewhat misleading, as comScore has actually presented average estimates of data taken from the quarterly period that spanned between December 2013 and February 2014. In any event, Google (NASDAQ:GOOG) Android and Apple iOS operating systems dominated respective 52.1% and 41.3% shares of the market through this latest quarter. BlackBerry closed out this latest time frame holding onto a meager 2.9% market share. BlackBerry actually lost 60 basis points in market share off the prior quarter.

The Bottom Line

The party is over for John Chen, BlackBerry, and what has largely amounted to a financial engineering scheme over the last quarter. BlackBerry must create exciting product to generate real, long-term shareholder wealth, rather than simply trading barbs with wireless executives, firing workers, and selling off real estate. While Apple (NASDAQ:AAPL), Samsung (OTC:SSNLF), and even Microsoft (NASDAQ:MSFT) move on to larger phones and phablets, BlackBerry is likely to incur significant asset write-downs upon older handsets destined for India. BlackBerry shares closed out the April 25 trading session at $7.28, which calculated out to a sharp, 31.3% decline off the aforementioned February highs. Wall Street traders have now applied a $3.8 billion market capitalization price tag to BlackBerry.

On March 28, 2014, BlackBerry filed its Q4 and fiscal 2013 report with the U.S. Securities and Exchange Commission. For the year, BlackBerry racked up $5.9 billion in net losses off $6.8 billion in revenue. $1.3 billion in tax credits actually went towards buffeting what would have been a $7.2 billion annual loss. The 2013 figures did include $2.7 billion in asset impairment charges. BlackBerry generated $18.4 billion in net sales, as recently as 2011. The wheels have truly fallen off at BlackBerry.

If anything, liquidity has emerged as a real concern at BlackBerry. The latest BlackBerry balance sheet profiled $7.6 billion in assets above $3.9 billion in liabilities. Last year, BlackBerry held $13.2 billion in assets above a mere $3.7 billion in total liabilities. The BlackBerry balance sheet and cash flow performance has deteriorated rapidly, despite the fact that the firm took on $1.25 billion in debt over the past year. Interestingly, BlackBerry may have very well have already gone insolvent, if it were not for the $1.25 billion convertible bond lifeline out of Fairfax, its most powerful shareholder. As a creditor, Fairfax rights would also trump those of equity owners, in the event of any bankruptcy. That being said, BlackBerry shareholders should immediately liquidate their positions, in order to avoid staggering losses over the next year.

Disclosure: I am long AAPL. 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.