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BlackBerry: Buy, Hold or Sell?
Posted by: Fede Zaldua (IP Logged)
Date: November 4, 2013 05:23PM

It's extremely tough to tell anyone what to do with their BlackBerry (BBRY) shares, still being held by investors such as Charles Brandes. I was sure a deal to sell the company to a stronger player such as Lenovo was coming. But I was dead wrong. BlackBerry just announced that it halted the sale plan. Instead, the company will issue $1 billion worth of convertible bonds to institutional investors such as Fairfax (FRFHF), the Canadian insurance company which had agreed to acquire BlackBerry for $4.7 billion.

Transition in Place

According to John Chen, BlackBerry's new interim CEO, the company needs to recover itself before being sold. The company's new leader has some experience in the matter. After all, he was able to sell the troubled tech company Sybase (a company that was considered doomed when he took over in 1998) to SAP for $5.8 billion. In Chen's words, “BlackBerry is an iconic brand with enormous potential but it’s going to take time, discipline and tough decisions to reclaim our success… I look forward to leading BlackBerry in its turnaround and business model transformation for the benefit of all of its constituencies, including its customers, shareholders and employees.”

Upon the closing of the bond issuance, Chen shall be appointed executive chair of BlackBerry’s board of directors and he will continue to serve as CEO until a new executive leader is found. Meanwhile, Thorsten Heins (the former CEO) and David Kerr will resign from the board.

The Future Ahead

According to most analysts, BlackBerry will continue to struggle for the foreseeable future. Credit Suisse's analysts assume that the company will suffer an operating loss of $911 million in 2014 and $400 million in 2015. Clearly, in such a dynamic sector all forecasts are extremely prone to error. That said, it's clear the future does not look easy for BlackBerry and its shareholders.

On the one hand you can find BlackBerry's handset business which will be very tough to turn around given the ultra-competitive nature of the industry. This segment is the one responsible for the huge free cash flow (FCF) burn the company is suffering – expected at $984 million for 2014. On the other hand, you have the services business, which is the company's FCF engine. That said, the services business is slowing fast. It's losing revenues as subscribers are leaving the old BB7 platform.

If BlackBerry would be able sell its hardware business and continue to run its services business while giving cash back to its shareholders (from the services business), I see considerable value in the shares. I would also see value in the shares if the company's management would re-consider the idea of selling the entire company to a stronger strategic player.

Otherwise, I think that the risks remain too high at the current market capitalization level ($3.3 billion). I would re-consider owning the shares if a credible plan is set in motion. It's very tough to buy shares of a company that is losing revenue and is not planning to sell itself or give cash back to shareholders from the operations that are still creating cash flows. I would stay on the side lines.

Stocks Discussed: BBRY, FRFHF,
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