BlackBerry’s smartphone business problems means potential acquirers will pick over its more alluring assets, including software and patents, which together may be worth about $5 billion, roughly in line with the company’s current market value.
BlackBerry’s biggest source of revenue is their phone unit and is essentially worthless because most buyers would shut it down in favour of their own technology, at a cost of as much as $800 million, said analysts at Raymond James Ltd. and BMO Capital Markets.
Its patents, software and a secure network are each worth more than $1 billion, the analysts said, and the company has about $2.8 billion in cash.
BlackBerry appointed board members last week to analyze a sale or new partnerships to try to turn the company around. The value of the hardware unit may plummet further as customers shy from buying a device whose future is up in the air, leading acquirers to gravitate to BlackBerry’s other assets, said Brian Huen, managing partner at Red Sky Capital Management.
“You’re effectively killing that business by saying ‘I’m up for sale,’” said Huen, whose Toronto-based firm manages about $220 million in assets including BlackBerry shares. “Nobody is interested in buying the entire entity. I think they are now in the phase of saying, ‘We will do anything to maximize value, including breaking up the company.’”
Lisette Kwong, a spokesperson for BlackBerry, declined to comment about a potential breakup and sale of the company’s parts.
BlackBerry hired JPMorgan Chase & Co and RBC Capital Markets 17 months ago to explore its strategic options as sales of the company’s phones tumbled amid competition from Apple and Samsung. Those bankers contacted possible bidders late last year and found little interest in buying the whole company, particularly from private-equity firms, said two people familiar with those discussions.
BlackBerry’s share of the global smartphone market fell to 2.9 per cent in the second quarter from 4.9 per cent a year earlier, behind Microsoft’s Windows Phone platform, Apple’s iOS and Google’s market-leading Android, according to research firm IDC.
Speculation that the company might be taken to private to be restructured or broken up out of the public spotlight accelerated after the Aug. 12 announcement, in which Prem Watsa, a Toronto-based businessman and BlackBerry’s largest shareholder, said he would step down from the board. The company did not mention going private as an option at the time.
“We struggle to assign any value to the hardware business given the belief the most logical acquirer of BlackBerry would likely attempt to transition BlackBerry’s subscriber base to its own competing smartphone products or ecosystem,” Michael Walkley, an analyst at Canaccord Genuity Inc. in Minneapolis said in an Aug. 12 note. He rates BlackBerry a sell.
In addition to its cash, BlackBerry has smartphone patents, an operating system that powers car-information systems and even nuclear power plants, and a network of secure servers that cater to millions of government and business users. The company had 72 million smartphone subscribers at the end of June.
Tim Long, an analyst at BMO Capital Markets in New York, puts the cost of shutting down BlackBerry’s hardware unit at about $800 million, or $1.50 a share. He rates BlackBerry a hold.
The company’s cash reserves will be worth about $2.6 billion at the end of this fiscal year; its patents and other intellectual property might fetch $1 billion; the network would be worth $1.2 billion; and the software about $1.5 billion, Long said in an Aug. 13 note to clients.
Subtracting the $800 million estimated cost of shutting down the handset businesses, that would give BlackBerry a sum-of-the-parts value of about $5.5 billion, or $10.50 a share.
Raymond James Ltd. put the value of BlackBerry’s patents higher, as much as $1.6 billion, while ascribing a value of zero to its once-lucrative services business as the hardware losses erode the service revenue BlackBerry earns from each subscriber. Raymond James Ltd.’s Steven Li, said in an Aug. 12 note BlackBerry is probably worth about $4.5 billion, or $8.70 a share, if broken up. Toronto-based Li rates BlackBerry a hold.
A breakup scenario is more likely because few buyers want and are willing to pay for all of BlackBerry’s assets, even at the stock’s depressed valuation, said Joe Compeau, an information-systems lecturer with Ivey Business School in London, Ont. That means it could be headed for the same fate as Nortel Networks. Nortel filed for bankruptcy in 2009 and sold its main assets in a series of auctions that fetched $7.8 billion for its creditors.
“What happened with Nortel, where they just started selling bits of it, that could happen,” Compeau said. “There’s not that many players who can extract value from all those different parts.”
Unlike Nortel, BlackBerry has never issued debt and had $2.8 billion worth of cash and cash equivalents at the end of June, more than enough to ward off bankruptcy.
Bloomberg News
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