On Monday morning, beleaguered smartphone maker Blackberry (BBRY) announced the resignation of CEO Thorsten Heins, as well as a $1 billion private placement of convertible debentures.
Heins’ departure comes as little surprise in the wake of weak performance from Blackberry 10 which coincided with a write-down of nearly $1 billion in inventory. As for raising capital, one might assume that a well-capitalized company like Blackberry wouldn’t need new capital; however, its current cash-burn suggests an interjection is necessary if the company wishes to attempt (another) fundamental turnaround.
The New Leadership
John S. Chen will replace Heins as interim CEO and chairman of the board of directors. Chen is best known for his reign atop Sybase where he was responsible for taking the company from a market capitalization of $362 million to a $5.8 billion sale to SAP (SAP) in 2010. Chen currently sits on the board of directors at Disney (DIS) and CIT Group (CIT).
Although he comes from a highly-technical background, Chen faces a potentially insurmountable challenge when it comes to turning around Blackberry. Blackberry’s market share has vanished thanks to competition from Apple (AAPL), Google (GOOG), Microsoft (MSFT) and its own lack of innovation.
Chen will have several options, including finding a buyer, replacing the Blackberry operating system with Windows or Android, or perhaps breaking up the company. Still, none of these options are fundamentally sound and each brings a different set of challenges. Considering his experience with enterprise customers at Sybase, Chen will probably focus on repositioning Blackberry as an enterprise company, potentially withdrawing from the consumer market.
$1 Billion in New Capital
On the positive side, Chen will have $1 billion worth of new capital to attempt a turnaround. Fairfax Capital, which previously signed a $9/share letter of intent to acquire Blackberry, will contribute $250 million of the newly issued 6% unsecured convertible debentures that have a conversion price of $10. In our view, Fairfax was likely to back out of an acquisition all along—Fairfax had plenty of access to financial information beforehand, and it made a point to announce it signed a letter of intent and had not actually acquired Blackberry.
The price of new capital was fairly expensive but appropriate given the weakness of Blackberry’s operating business. Nevertheless, the new capital provides Blackberry with short-term stability as it works to figure out a profitable business model.
Valuentum’s Take
Chen faces a difficult road ahead, even after Blackberry raised $1 billion in fresh capital. Unlike Apple, which possessed a rich history of innovative products and a revolutionary CEO, Blackberry simply had a first-mover advantage that was eroded by years of lagging the competition.
We like the company’s decision to appoint Chen as the chairman of the board because he will likely direct the company’s focus toward the enterprise market, but we still do not feel very optimistic about the odds of a turnaround. The day of the $9 bid from Fairfax may very well have marked the near-term high in shares of the former smartphone giant. We’re avoiding Blackberry in the portfolio of our Best Ideas Newsletter at this time.
RJ Towner owns shares of the following companies: AAPL