Back in July 2012 we posted an article on BlackBerry (then known as Research in Motion - RIM) that noted and asked the following:
On Monday July 23, 2012, we learned through a regulatory filing that the company’s largest shareholder, well known value investor Prem Watsa, through his Canadian investment firm Fairfax Financial Holdings Ltd., now owns just under 10 percent of the company's shares after buying a substantial block of stock earlier this month. The latest round of buying was executed as the stock continues to languish – currently somewhere around $6.50 a share (does anyone remember when RIM was trading at $149?). Does Watsa, who has been a RIM board member since January 2012, know something the rest of us don’t?
From RIMM's price of $6.50 then to today's BBRY price of $16.59 (BlackBerry's US stock name changed from RIMM to BBRY with the company name change), Watsa is looking at a nice $10 per share pop on the shares he acquired below that price (he owns many shares that were purchased at much higher prices). So the investment has probably been sort of successful to date. But Watsa really has a dilemma on his hands. How so?
To begin with, as nice as that current $10 per share pop might be to you and me, for a major investor such as Watsa it is but a small incremental rise in value relative to his investment. Watsa is looking for much more than that - $75 to $100 would be in line with a suitable return on investment. But…what is BBRY going to do over the rest of the year? That is the issue at hand.
As we and others have noted, the BlackBerry 10 OS and the new BlackBerry Z10 - which is now selling in Europe and Canada, merely puts BlackBerry at the starting gates to a recovery. US deployment won't happen until sometime in March, but that looks to remain on track. T-Mobile just this morning publically announced that its tests of the Z10 are going well and the company believes it will be the first US carrier to launch the device.
Frank Sickinger, head of business sales for T-Mobile USA notes that, “The Z10 is more stable than we anticipated. If we are able to speed up the launch date, we will do that. Right now it’s looking like mid-March.” Sickinger also says that, "The $199 price BlackBerry announced on the launch day is consistent with what T-Mobile USA has considered. We also anticipate being able to offer the Z10 to business customers about a week before retail sales start."
Unfortunately, on launch day on January 30, 2013 BlackBerry did not provide a firm U.S. release date, and only stated that the Z10 would be available sometime in March. Not surprisingly, this raised concern among investors, who drove down BlackBerry’s stock 17 percent on Thursday and Friday last week. The stock had edged up to $18.32 prior to the launch.
Thorsten Heins, President & CEO of BlackBerry, noted yesterday that, "In Canada, yesterday was the best day ever for the first day of a launch of a new BlackBerry smartphone. In fact, it was more than 50 percent better than any other launch day in our history in Canada. In the UK, we have seen close to three times our best performance ever for the first week of sales for a BlackBerry smartphone."
The above is certainly a positive statement, but it doesn't include any actual sales numbers. Accounting for the fact that there are 80 million global BlackBerry subscribers and that they have waited for a year to see a new device, those upbeat numbers are less upbeat than they might otherwise appear to be.
It is well worth repeating that Heins has played an extraordinarily bad hand extraordinarily well - but the company has miles to go before it can sleep - sorry Robert Frost, we couldn't resist. And many dollars per share to go before Watsa can rest. Can BlackBerry recover?
Uncertainty Remains Constant
The fact that BlackBerry was not able to provide a definitive US launch date was disconcerting, even to those of us looking at the launch from a non-investment perspective. Further complicating the picture and adding to the uncertainty is the sad fact that the company's full keyboard device, the Q10 - which retains its old heritage for those who still haven't evolved into the touchscreen decade we now live in, won't be available until late summer or early fall!!! (Yes, it deserves three exclamation points.)
How BlackBerry - so many months late and well behind the curve - can continue to deliver such uncertain news is beyond us. So yes, the Z10 gets BlackBerry to the starting line of recovery but the company looks shaky to us as it places its feet on the starting blocks. Perhaps that helps to explain why yesterday BlackBerry announced two new board members. These are additions to the board, raising the number of directors to 12.
The new members of the board are Richard Lynch, a retired executive vice president of Verizon Communications and Bert Nordberg, the former chief executive of Sony Ericsson Mobile Communications. It is true that BlackBerry Chairwoman Barbara Stymiest had promised to grow the board after she took over as chairwoman following the exits of Jim Balsillie and Mike Lazaridis. But that was almost a year ago. Stymies says of the new board members, "We are looking forward to their contributions as we continue to drive for long-term shareholder value and seek opportunities to leverage the extraordinary BlackBerry 10 platform."
Those are interesting words. Lacking from them are the words "grow the company through sales."
Shareholder value can be increased through a sale of the company, or through greatly increased revenue through licensing BlackBerry OS. We doubt that BlackBerry will achieve any sort of momentum shift within the industry. At best we believe the new devices will be sold to a subset of the 80 million current BlackBerry users. Yes, that will generate lots cash in hand (something Watsa likes, as he noted in one interview: "They have lots of cash, huge cash flows…"), and that will look good to a potential buyer of the company. We ourselves remain steadfast in our belief that Samsung should acquire BlackBerry.
We are completely puzzled by the choice of the new board members. Both may be gritty veterans, but both are also fully old school. Sony Ericsson is best remembered as one of the companies pushed into complete oblivion by Apple. And turning to a veteran of Verizon Communications when so much rests on the need to innovate strikes us as sheer folly. If the plan is to sell BlackBerry off however, they make more sense to us.
The Prem Watsa Barameter
In the meantime, Prem Watsa has to sit on his shares. Watsa's BlackBerry investments began in Q3 2010 when RIMM was trading at around $50 per share. He added to his position ongoing, as the price continued to fall, with his largest purchase taking place in Q3 2012 (noted at the beginning of our story) when he picked up more than 25 million shares at roughly $7 per share. Watsa's problem is that he cannot simply sell off and take the relatively small profit that would entail. In fact selling off 10 percent of BBRY would send the share price down. He has to hold on to the stock and hope for a major ride up.
Our belief as to what Watsa's strategy is a combination of significant cash in hand and the perception at least that BlackBerry is back in the race will drive a sale to a large buyer. If the stock is headed North that would allow Watsa to demand an added premium to the stock price.
We would have more hope for BlackBerry if both the Z10 and Q10 were already selling in the United States. And let's not forget tablets, of which new devices should have appeared as well on launch day. The uncertainty generated by the lack of such is enormous and probably will prove indicative of how BlackBerry is likely to proceed going forward the rest of this year.
Meanwhile, Apple and Samsung - and very likely Microsoft and Nokia - will have raised the bar again, before BlackBerry can even catch up to where the bar rests today.
Edited by Ashley Caputo