Wells Fargo Sees Two Accretive Moves for Blackberry (BBRY) But Only One is Likely

Wells Fargo analyst, Maynard Um, believes Blackberry (NASDAQ: BBRY) should exit the hardware business (but won't) to see an additional ~$0.70 per year in EPS. However, a likely upcoming debt redemption will add $0.03 per quarter to EPS.

Blackberry testing the waters to see if there is a market for a more secure Android phone is the right move. However, regardless, the end goal should be to exit the hardware business, which should result in incremental EPS of $0.67. The cash charge impact would be around $100MM.

If there is a market, they believe BBRY could profitably license out its security technology to handset OEMs (original equipment manufacturers). If there is no market for more secure Android phones, it would be logical to shut down and exit the hardware business completely and use the incremental profits and cash flow for M&A or share repurchases.

A sale of the business seems unlikely given the lack of scale and profits. A sale of its patent portfolio is also unlikely.

Convertible debt redemption would make sense and be accretive. BBRY has $1.25B in convertible debt with interest payable quarterly at a rate of 6% per year with an option to redeem after November 13, 2016 at a 4% premium. With annual interest of $75MM, they think the $50MM premium is worth it. BBRY, in their opinion, is no longer in the dire position it was when it needed to raise the debt and they feel $1.3B in net cash is more than sufficient to fund ongoing operations. They estimate this would benefit quarterly EPS by $0.03.

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