The end is nigh for RadioShack (RSH). After years and years on its path toward obsolescence, RadioShack may be finally throwing in the towel. The Wall Street Journal reported January 14 that the electronic gadget store that shares its name with the technology of yesteryear is prepping for a bankruptcy filing as early as February. The penny stock once traded north of $20 as recently as a few years ago, and forever, Radio Shack will be an excellent example of why share buybacks aren’t always a good thing.
Should RadioShack sign the bottom line sealing its fate, there are a few things that could happen with the equity. The first is obvious. RadioShack’s equity will be cancelled at the end of the bankruptcy process and under the reorganization new shares will be issued. Under this scenario existing equity shareholders will receive absolutely nothing. The second outcome is much more unlikely. Equity holders could argue that its real estate warrants some residual value and that would form the case where existing holders might get something.
For individual investors, the second scenario is not something to bet on, in our view. Bankruptcy specialists will likely have an upper hand reading court documents and in assessing the residual value of RadioShack in bankruptcy. From our experience perhaps one in a hundred companies have anything left over for pre-petition equity holders at the end of the restructuring process. Though the odds are slim however, it is not impossible. American Airlines (AAL) is the latest example where equity holders got something.
In other news, the rumor mill is active. According to Reuters, Blackberry (BBRY) was approached by Samsung (SSNLF) to be acquired for as much as $15.49 per share. The reason for the interest rests in Blackberry’s patent portfolio. To us, Blackberry’s appeal to Samsung is less clear. If Blackberry could not effectively compete with Apple (AAPL) using its existing patent portfolio, how could Samsung? Combining two firms that are struggling to overcome the iPhone giant’s ecosystem does not make a better company.
Blackberry threw cold water on the entire deal and denied having talks with Samsung regarding combining forces. We found it interesting that Blackberry would even comment on such rumors and especially that it would deny them. Blackberry’s survival in part rests on an elevated stock price to issue new equity to fund a turnaround. Shooting down rumors runs counter to that effect.
Blackberry may indeed be purchased, but it may not be Samsung and it may not come at a price that is amenable to existing shareholders. Our fair value estimate of Blackberry is $11 per share, and that depends on an aggressive U-shaped recovery which cannot be guaranteed. Apple’s risk-reward scenario is much more favorable to investors, in our view.