Citi Assumes/Downgrades BlackBerry (BBRY) at Sell; Total Cost of Shut Down Est. at $4B

December 10, 2013 4:16 PM EST
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(Updated - December 10, 2013 5:03 PM EST)

Citi assumed coverage on BlackBerry (NASDAQ: BBRY) with a Sell and a price target of $4.00. (Prior rating was Neutral with price target of $7). Interestingly, shutting down the business in unlikely to add value, said analyst Ehud Gelblum.

"Oddly enough, simply shutting the business is also not likely to add value as the separation costs and purchase commitments that we estimate would be incurred could exceed the company's cash balance and would likely require substantial renegotiating of agreements with manufacturers. In short, we see no clear-cut strategy, simple or otherwise, to help BBRY out of the strategic box it finds itself in and believe wind-down costs could come close to wiping out a great deal of the current cash balance on which the current valuation is based while the ongoing cash flow from the legacy Services business should dry up quickly. Short of a longshot turnaround and commercialization of the BBM business, we see few options for the company," said Gelblum.

"In addition to its $400M CORE restructuring program leaving the company with 7,000 employees, an extrapolation of the current 4,500 plan reduction, suggests another $450M-$500M in various separation costs in the event Blackberry laid off its remaining 7,000 employees. In addition, there may be other separation costs related to hardware, such as the $1.5B with EMS companies, $1B in capex commitments likely related to its Network Operation Centers (NOCs),$400M of other purchase commitments, and over $200M in operating leases, easily putting total costs to shut down the business at around $4B and consuming all of Blackberry's cash of $2.6B and the additional $1B it recently raised from Fairfax. Another unknown is future restructuring costs plus wind-down costs if Blackberry decides to stop producing hardware as we do not see a robust market for Blackberry's enterprise and "prosumer" devices with advent of BYOD and iPhones/
Android devices creeping into the workplace managed by a slew of mobile device
management applications from third parties," he added.

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 $5.75 yesterday.

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