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Is Now the Time to Go Long BlackBerry?
Posted by: Federico Zaldua (IP Logged)
Date: September 24, 2013 10:15PM
After having pre-announced dismal second quarter 2014 results, BlackBerry (BBRY) said it reached a preliminary deal to take the company private for $4.7 billion in cash ($9 per share). The company is indeed in terrible conditions. Second quarter 2014 sales were projected at just $1.6 billion, roughly half consensus of $3.1 billion. Volumes came down by 45% quarter over quarter (qoq) and BB10 hasn’t built any momentum yet. That said, there is a fair price for every asset and somebody has finally made a bid for the entire enterprise. Should you go long BlackBerry now?
The Preliminary Deal
Finally, a consortium led by Fairfax Financial Holdings (FRFHF), which is one of BlackBerry's largest shareholders, has seen value in the company and made a bid for it. After analyzing the $4.7 billion bid, BlackBerry's board of directors has approved terms of a letter of intent from the group led
by the Canadian group. While the due diligence process is expected to be completed by November 30th, Blackberry is permitted to engage in negotiations for other offers. That said, if it were to find a different buyer, the phone maker would have to pay a significantly high $150 million break-up fee. BlackBerry's market capitalization is, as for today, $4.45 billion. Hence, the current upside potential of the stock if the deal were to be completed under the currently offered terms is 5.6%.
Does It Make Sense to Go Long BlackBerry?
If the deal takes place, I would expect the deal to be finally realized by the end of March 2014. This is six month from now. Under this circumstances, your annualized yield would be 11.5% or greater, depending on the timing of the deal. Fairfax is still seeking financing from Bank of America Merrill Lynch (BAC) and BMO Capital Markets so, even when the due diligence is over by November the 30th, the deal is going to take some months to be completed.
If the deal breaks and nobody else is willing to bid for the company, the downside is significant. According to Credit Suisse, “If BlackBerry shuts down its hardware segment and continues to run its services segment over the next 2 years, we arrive at a NAV of $3.6 billion, or $7 per share.” This would add a 20% further fall to the current stock price. Nevertheless, I believe that the probabilities of a deal break up are, at this point, rather small. Still, risking 20% of your capital to make a 5.6% gain doesn’t sound reasonable to me.
Given all the reasons explained above, I would start buying the stock when BlackBerry's market capitalization falls under $4.30 billion. Under such price, your direct yield would be just about 9.3%. If the deal is completed in six months or less, your annualized yield would be at least 19.5%. All companies are worth something when they still produce cash flows. In the case of BalckBerry, its services segment is still profitable and a turn-around of its hardware division is still possible. With a fair margin of safety I would bet on this deal to be completed rather sooner than later. Go long, if the right price comes along! Investors such as Charles Brandes and Donald Yacktman are still long on the name.
Guru Discussed: Charles Brandes: Current Portfolio, Stock Picks
Stocks Discussed: BBRY, FRFHF, BAC,
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