BlackBerry’s head office in Waterloo, Ont.MARK BLINCH/Reuters
The decline of BlackBerry Ltd.'s handset business makes it extraordinarily difficult to put a price tag on the company, but Prem Watsa appears confident that his group's offer of $9 (U.S.) a share represents fair value for the smartphone maker.
Mr. Watsa, head of Fairfax Financial Holdings Ltd., used to serve on BlackBerry's board, so his estimate of the company's worth is based on an intimate knowledge of its balance sheet and prospects.
However, it's a valuation that seems to depend heavily on the Waterloo, Ont.-based company's patent portfolio and service businesses – both of which could hide surprises.
Mr. Watsa is unlikely to be putting much weight on the company's handset sales, which represented 60 per cent of its revenue during the last fiscal year.
BlackBerry's share of the global smartphone market is now less than 3 per cent, while its new Z10 and Q10 devices have been met with widespread apathy. As a result, most analysts assign little, if any, value to the handset operations.
On a brighter note, BlackBerry is now sitting on $2.8-billion in cash, which is equal to $5 per share. That provides a good head start on the $9-a-share takeout price, although there are substantial costs ahead for employee severance and other restructuring.
And then there is BlackBerry's patent portfolio, which Scotia Capital Inc. analyst Gus Papageorgiou believes is worth $4.25 per share. If a buyer were able to sell the patents for that amount, and combine the proceeds with BlackBerry's cash hoard, the $9-a-share takeout price would be fully covered.
But the value of patents can't be pinpointed until they're actually sold. Also, any potential break-up of the company would create problems about which patent goes with which business. So Fairfax would presumably want to pay less than the theoretical value of the BlackBerry's intellectual property.
The part of BlackBerry that appears to have the most potential as a sustainable business is its services arm, which operates the company's secure network. Last year, the services unit accounted for $4-billion or 35 per cent of the company's revenue.
Mr. Papageorgiou believes that by supporting Android and Apple devices, and by expanding into the health care and automotive sectors, Blackberry's network services business could grow by 50 per cent in coming years, to almost $6-billion in revenue.
However, that revenue can't be guaranteed. So a significant discount should be applied to reflect the risk of actually winning customers and implementing the services.
Choosing the right discount method is more art than science, but if a buyer were to assume that it could maintain existing margins, the rising services revenue would increase profits by about $500-million in the next few years and add somewhere in the neighbourhood of $1 per share to the company's value.
The wild card is the Blackberry Messenger service. At the moment, it generates neither subscription or advertising revenue. But if a buyer were to find a way to use BBM as an advertising platform, much like Twitter, without alienating users, the service would be worth a lot of money. However, putting a value on potential is difficult.
Of course, Mr. Watsa may believe that the handset business can be revived, which changes the takeout math substantially.
For now, though, it seems more likely that cash, patents, network services revenue and the Blackberry Messenger application are at the heart of the value he's putting on the company.