RIM Deal Seen Dubious With Cheapest Value Amid Losses
Research In Motion Ltd. (RIMM) needs more than the cheapest valuation in the communications-equipment industry to lure potential buyers. It also needs a hit smartphone.
RIM of Waterloo, Ontario, said last week it will review options, including joint ventures and licensing agreements, and predicted “continued pressure” on revenue and earnings as its BlackBerry loses market share to Apple Inc. (AAPL)’s iPhone and Google Inc. (GOOG)’s Android system. After the shares fell 77 percent in the last year, the $6.8 billion company traded yesterday at a 32 percent discount to the value of its net assets, the only communications-equipment maker greater than $5 billion selling at less than book value, according to data compiled by Bloomberg.
With Chief Executive Officer Thorsten Heins saying the smartphone maker would also consider a sale, an acquirer could pay a 41 percent premium and still buy RIM at the industry’s lowest price relative to earnings. Ironfire Capital LLC says RIM may attract interest from Amazon.com Inc. (AMZN) with its operating system and tablet, while Samsung Electronics Co. (005930) may be drawn by the e-mail and messaging infrastructure, said Recon Analytics LLC. Still, the fate of the company -- and any takeover -- rests on the success of new BlackBerry 10 devices to stabilize customer losses, according to UBS AG.
“It’s easy to say it’s cheap and that somebody’s going to acquire RIM, but it becomes a little bit harder in reality,” Walter Todd, who oversees about $950 million as chief investment officer at Greenwood Capital in Greenwood, South Carolina, said in a telephone interview. “They’ve had some stumbles from an innovation standpoint. Why rush to catch a falling knife?”
Today, RIM shares fell 1.9 percent to $12.76, the lowest price since Dec. 20.
Tenille Kennedy, a spokeswoman for RIM, said the company doesn’t comment on speculation and referred to Heins’ comments last week.
While Heins said on March 29 that a sale would be considered, it’s not the “main direction” for RIM’s strategic review. Heins, who became CEO in January, also said RIM will refocus on business customers and more targeted consumer segments after sales missed analysts’ estimates for the fifth straight quarter.
RIM’s BlackBerry, the dominant smartphone in the U.S. before Cupertino, California-based Apple unveiled the iPhone in 2007, has lost market share in the past three years as consumers turned to iPhones with faster Web browsers and more applications.
‘Running Away Faster’
While former CEOs Jim Balsillie and Mike Lazaridis, who both stepped down in January, had assured investors the latest iteration of its smartphone would deliver a revival, BlackBerry 7 devices with better Web browsing and touch-screen navigation failed to do so after going on sale last year. Total sales last quarter tumbled 25 percent from a year earlier as U.S. revenue plunged 57 percent, RIM said last week.
The U.S. decline reduced RIM’s share of the worldwide smartphone market to 8.2 percent in the fourth quarter from 14 percent a year earlier, while Apple’s share rose to 24 percent from 16 percent, according to research firm IDC. Market share for Samsung, the biggest handset maker to run Android, jumped to 23 percent from 9.4 percent.
“The competition has more resources, they’re further ahead and they’re running away faster,” James Faucette, a Portland, Oregon-based analyst for Pacific Crest Securities, said in a phone interview. “At some point it will get cheap enough that somebody will buy it. I don’t think it’s cheap enough yet.”
Valued as high as $83 billion in June 2008, RIM’s market capitalization plummeted to $6.8 billion as of yesterday. The stock’s 91 percent plunge from its peak is the second-steepest in the Nasdaq-100 Index. (NDX) In the same time, Apple shares have more than tripled, giving the company a market value of $587 billion as of yesterday.
RIM traded yesterday at 0.68 times the value of its assets minus liabilities, after falling below book value in November, data compiled by Bloomberg show. Its peers had a median price- to-book multiple of 2.3, the data show.
“I don’t think there’s any urgency to acquire RIM given what’s happened to the stock,” said Todd of Greenwood Capital. “Having said that, it is trading below book value and at some point it becomes attractive.”
The company is also the least expensive in the industry relative to free cash flow and its $1.16 billion in net income in the last 12 months, the data show.
After annual revenue at RIM fell for the first time in the company’s history last year, sales are projected to drop 16 percent this fiscal year to $15.5 billion, according to analysts’ estimates compiled by Bloomberg. The company also posted its first quarterly net loss since 2005. RIM said it will no longer give financial forecasts, in part because of “weakness” in its U.S. business.
RIM’s Heins is counting on the new BlackBerry 10 operating system to stabilize sales. The first device will come out in the “latter” part of this year, he reiterated last week.
A full takeover of RIM or a licensing deal is “only conceivable once business conditions stabilize and after BB10 devices have proven some success,” Phillip Huang, an analyst with UBS in Toronto, wrote in a March 30 note. “RIM’s future depends on BB10. There is simply too much flux at this juncture for any acquirer to have a good handle of the intrinsic value of this company.”
Still, an acquirer could pay as much as $18.37 a share for RIM and value the company at only 6 times last year’s earnings, less than all of its peers, which trade at a median of 18 times, data compiled by Bloomberg show. That would be 41 percent higher than RIM’s closing price of $13.01 yesterday.
Amazon as Buyer
Amazon, which began making electronic reading devices in 2007, has “slowly shown the desire to move into consumer electronics,” said Brian Blair, a New York-based analyst at Wedge Partners Corp. Acquiring RIM would allow Amazon to enter the mobile handset and smartphone business, he said.
Eric Jackson, president of Ironfire Capital, said Seattle- based Amazon would be a logical buyer as it looks to shore up its tablet business.
Mary Osako, a spokeswoman for Amazon, said the company doesn’t comment on speculation, when asked whether it would consider buying RIM.
While RIM’s PlayBook tablet initially garnered praise for its hardware capabilities and the power of its operating system, the device was panned by other critics for lacking a dedicated e-mail and calendar program. A series of marketing gaffes and delay in introducing an e-mail upgrade also hurt sales.
Samsung Chasing Business
Amazon’s unprofitable Kindle Fire tablet has been “very underwhelming” as readers switch from physical books to digital, said Jackson. Although sales of RIM’s PlayBook have been lackluster, its software offers “a potentially legitimate operating system for them to look at buying that could help them,” he said.
Samsung, the world’s No. 2 handset maker, may also consider an acquisition to get a hold of RIM’s business e-mail infrastructure and messaging service as the Suwon, South Korea- based company pursues the corporate market, said Roger Entner, an analyst at Recon Analytics in Dedham, Massachusetts. RIM has 77 million subscribers around the world, many of whom are loyal to their devices because of the free BlackBerry Messenger instant messaging app.
“Buying BlackBerry would give them that differentiation factor of superior e-mail and Messenger,” Entner said.
Samsung is not considering an acquisition of RIM, Nam Ki Yung, a Seoul-based spokesman, said in an e-mail. The company said it doesn’t comment on market speculation when asked if it’s considering a licensing deal with RIM.
HTC Corp. (2498), Asia’s second-largest smartphone maker, shouldn’t be ruled out as a buyer of RIM because the company needs to differentiate itself from Android rivals as sales stagnate, said Entner. The Taoyuan City, Taiwan-based company has missed analysts’ sales estimates for three straight quarters because of competition from Apple and Samsung.
“HTC might actually need them more than Samsung does,” said Entner. “They’re a one-trick pony whereas Samsung makes everything under the sun.”
Linda Mills, a spokeswoman for HTC, could not be reached outside of normal business hours.
Even if BlackBerry 10 is able to retain customers, it may not be enough to fix RIM’s problems and attract buyers, according to Faucette at Pacific Crest.
“I don’t expect BlackBerry 10 will change things much,” Faucette said. “Ultimately, they’re a dwindling business.”
‘Wait and See’
RIM shares fell 9.5 percent yesterday, the most since December, on speculation potential bidders are losing interest.
Anil Doradla, a Chicago-based analyst for William Blair & Co., says RIM is more likely to receive interest in a joint venture or licensing deal because competitors won’t want to pay for the whole company.
“I’m sure a lot of people have been kicking the tires, but I think a sale is pretty tough to come up with,” Thornton said in a phone interview. Instead, licensing BlackBerry 10 would be appealing to a company like Samsung to help lessen its dependence on Android, he said.
Still, if RIM becomes a “single-digit stock,” it may feel the desperation to sell and suitors may be willing to take the risk on a full acquisition, said Blair at Wedge Partners.
“RIM, as well as any potential acquirers, are going to watch and see what happens to RIM’s subscriber base this year and how the new version of BlackBerry does this year and whether there’s anything worth owning,” Blair said. “Any potential suitors are going to wait and see how that’s received by consumers. Nobody knows just how bad this could get.”
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