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BlackBerry (BBRY) LBO Makes Sense; Stock Worth $15 in LBO Scenario - Jefferies

August 12, 2013 1:11 PM EDT Send to a Friend
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Price: $7.15 -0.83%

Rating Summary:
    6 Buy, 36 Hold, 19 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 34 | Down: 12 | New: 36
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Jefferies analyst Peter Misek weighed on BlackBerry (NASDAQ: BBRY) Monday amid news the company is exploring strategic options, including the potential sale of the company.

Misek believes an LBO is possible. "Due to the lackluster BB10 launch, we think the board is actively considering taking the company private or selling the company (we view Samsung as most likely)," he said. "With interest from several large Canadian funds and rescaled opex, we think an LBO is feasible."

The analyst thinks Prem Watsa's resignation from the board supports a possible LBO. "Prem Watsa, CEO of Fairfax Financial and BlackBerry's larger holder with a 10% stake, will resign from the board due to conflicts of interest; however, he maintains his support for BlackBerry and does not intend to sell shares."

Misek also notes that last Friday, Canadian Pension Plan CEO Mark Wiseman in an interview with Bloomberg said that they would consider an investment in BlackBerry if the company were taken private.

In addition to Fairfax, potential players in takeout consortium, according to the analyst, include: Ontario Teachers’ Pension Plan Board (0.4%), The Public Sector Pension Investment Board (0.4%), Canada Pension Plan Investment Board (0.2%), The OPSEU Pension Trust (0.1%), and OMERS Administration Corporation (0.1%). Additionally the analyst believes Canadian banks such as BMO, CIBC, and RBC could be involved as well.

"In total, these institutions control ~17% of BlackBerry’s shares outstanding," Misek notes. "In total, current BlackBerry holdings represent 0.3% of the groups' equity assets, leaving plenty of headroom if they would like to increase their investments."

The analyst suggests a $15/share take-out price. "Our preliminary LBO analysis assumes revenues decline at 5% a year, opex cuts of 20% in FY15 and 10% in FY16 before flattening out, and capex returning to historical norms. Assuming 15% participation by current shareholders, a $15 take-out price, and $2B in debt raised would yield a low-$20s IRR."

In addition to a possible LBO, a strategic acquisition by Samsung is also a possibility. "While Lenovo would likely be the most willing buyer, we think the U.S. government would block an acquisition due to national security concerns. Regarding Samsung, with Moto X and the Motorola roadmap, the Android licensee's are no longer under any illusion that Google will compete with them directly. In 3 to 5 years this could be devastating to operating profits. Compounding this is the rapid commoditization and massive price erosion being caused by white label vendors in India, China, Mexico, and Brazil. Samsung has been exploring Tizen as an alternative; however, starting a new OS from scratch is unlikely to be successful even for the largest vendor in the world. But BB10 could provide a solid base for Samsung to develop its own ecosystem with its ability to virtualize Android and with around 150K apps."

For an analyst ratings summary and ratings history on BlackBerry click here. For more ratings news on BlackBerry click here.

Shares of BlackBerry closed at $9.76 yesterday.




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