Plummeting BlackBerry would stain any buyout

August 12, 2013

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

At the rate BlackBerry is plummeting, it would stain any buyout. A clean balance sheet makes the $5.4 billion Canadian company an enticing takeover candidate. Like Dell, it’s a technology icon in need of a turnaround. BlackBerry’s cash flow is worse, though, meaning applying leverage would be extra risky. And the Palm precedent should scare corporate buyers.

The formerly dominant smartphone maker has its attractions. With zero debt and nearly $3 billion of cash and short-term investments, it has left itself wiggle room to cope with the hard times. BlackBerry also owns a patent portfolio worth up to $1.5 billion, according to analysts at Jefferies. That means the market is essentially valuing the operating business of what was an $80 billion company not long ago at about $1 billion.

The market has largely become a duopoly dominated by Apple’s iPhone and handsets powered by Google’s Android. In the second quarter, the two systems accounted for more than 90 percent of all shipped devices, according to IDC. Not only did BlackBerry lose share, it shipped about 900,000 fewer devices than in the same period a year ago even as the market expanded.

Its dwindling appeal has resulted in a loss of pricing power and falling margins. BlackBerry is now in the red. The poor reception to its latest phone update means the trends are apt to worsen.

BlackBerry’s operations generated about $630 million of cash in its latest quarter, but two-thirds was chewed up by capital expenditures. A leveraged buyout at a 25 percent premium, less the cash, using one-third equity would leave $2.5 billion of debt to service. At an interest rate of 8 percent, that would cost almost $200 million annually. Based on the figures for the quarter ending June 1, it would take about a 25 percent fall in cash flow before reserves would need to be tapped. Given BlackBerry’s trajectory, it’s a scenario easy to see happening sooner rather than later.

Another company could try to find value in controlling an alternative mobile operating system. Hewlett-Packard had the same idea with Palm in 2010 – and wound up writing down about three-quarters of the $1.2 billion it spent on the acquisition. It’s hard to conceive of many buyers who wouldn’t just get squished by BlackBerry.

 

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