Could BBM chat service save BlackBerry after collapse of Fairfax deal?

These are stories Report on Business is following Monday, Nov. 4, 2013.

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BlackBerry tanks
Analysts are scrambling today to revise their outlook for BlackBerry Ltd. after the collapse of its tentative deal with Canada's Fairfax Financial Holdings Ltd.

For some, it's a doom-and-gloom scenario, for others a wait-and-see type of approach.

But among the more interesting views comes this one from Gus Papageorgiou of Bank of Nova Scotia: Can the huge success of its BBM chat service become the saviour of the embattled smartphone maker, at least in the short term?

To recap, as The Globe and Mail's Boyd Erman reports, BlackBerry announced today that it is no longer pursuing a sale of the company, choosing instead to raise $1-billion (U.S.) in new funds via a sale of convertible notes to a group that includes Fairfax.

It also announced that chief executive officer Thorsten Heins will leave the company, the position to be filled on an interim basis by John Chen, former chief of Sybase Inc.

Mr. Chen will also be appointed executive chair of the board, while Fairfax chief Prem Watsa becomes "chief director."

BlackBerry, whose fortunes have eroded since the days when it ruled its industry, had signed a letter of intent to be taken private by a Fairfax-led consortium for $9 a share, or $4.7-billion.

Its share price plunged after today's announcement, slumping 16.5 per cent by mid-afternoon to $6.49 on Nasdaq.

Amid that collapse, BlackBerry and Fairfax talked up the latest deal, Mr. Watsa saying that he still aims to keep the company intact, and Mr. Chen saying that "I think we're going to build tremendous value for shareholders."

Many analysts don't see it that way.

On the more pessimistic side is Kris Thompson of National Bank Financial, who slashed his price target on BlackBerry shares to $3 from $9 in a research report that noted "turnaround attempt number three not a charm."

Analyst Michael Walkley of CanaccordGenuity cut his price target to $6 from $7, saying he believes BlackBerry will not attract a buyer that would keep it intact.

Then there's Scotiabank's Mr. Papageorgiou, who, while certainly not keen on the outlook, nonetheless cited the recently renewed popularity of BlackBerry's BBM chat service, which was just recently made available to users of iPhone and Android-powered devices, resulting in more than 20 million downloads of the app.

"The only operating result that may deliver some hope in the near term is BBM," Mr. Papageorgiou said of BlackBerry.

There are now some 80 million BBM users around the world. And while some observers have questioned how BlackBerry is going to make money from it, the Scotiabank analyst suggested this could be done via advertising.

"We do expect the company will begin to announce its plans to monetize this social app in the not-too-distant future," he said.

"BBM Channels is expected to be out soon and we expect some kind of advertising model to come with that initiative. We are also expecting a business version of BBM to be announced."

Mr. Papageorgiou cited statistics showing average BBM users spending 90 minutes a day using the service. Not only that, but it's free, and could at some point see hundreds of millions a year in advertising-based revenue.

"In the near term we believe BBM could likely generate around $300-million/year in mobile ad revenue, similar where we believe Twitter is."

Twitter boasts more than 220 million users, he noted, with sales projected to climb next year to $1.2-billion, from 2013's $639-million.

Remember that Twitter goes public this week, with a new IPO range estimate today at between $23 and $25 a share. So, assuming a debut at $24, according to Mr. Papageorgiou, you get a value on the company of $13-billion or 10.8 times forward sales.

"If BBM were to receive a valuation anywhere close to this figure it could add substantial value to the shares," he said.

"At the moment, however, BBM is not driving revenue."

Here's what various analysts are saying today in the wake of the death of the Fairfax deal:

"While we maintain our belief BlackBerry will ultimately end up selling the company due to the difficult competitive smartphone market and low probability BlackBerry 10 can return BlackBerry to sustained profitability, we now believe a breakup is more likely than an outright sale and fundamentals will continue to deteriorate over a now-longer public sale process under new management." Canaccord's Mr. Walkley

"We are reverting to our fundamental thesis and lowering our target price to reflect a $1-billion debenture issue that is in priority to stock holders. Prior to the Fairfax take-private attempt we had a $5/share target price and a fundamental thesis that the subscriber base and shipments were about to head into a free-fall. Now there is about $2/share of debenture interest ahead of equity holders. There are no positive catalysts on the horizon short of a surprise take-private bid." National Bank's Mr. Thompson

"Now we're back to the downward spiral. They've got $1-billion more cash that buys them time. The drumbeat of negativity is likely to continue." Colin Gillis, BGC Partners, from Reuters

"The appointment of enterprise software veteran John Chen, former CEO of Sybase, as chairman and interim CEO of BlackBerry suggests that Fairfax and others see the company's future in software rather than devices. This makes sense in light of BlackBerry's sputtering device shipments over the past few months, but it's still not clear where that growth will come from." Jan Dawson, Ovum

"The important thing is, what is the strategy? They have a chance, and they have a little more runway with the additional cash, but they need to start making some smart decisions … This is a little disturbing given all the talk of interested bidders. I've always thought going private would be the right step for them." James Moorman, S&P Capital IQ, to Bloomberg

"Will Blackberry survive? If so, what will they look like and will they be successful? Right now there are no real answers for Blackberry. That is a very uncomfortable place to be for investors, customers, workers and partners." Technology analyst Jeff Kagan, from Agence France Presse

"It would have been so much simpler for them to just accept a cheque from a large suitor and be bought out. They already admitted a year and a half ago they couldn't go it alone; now they have to go it alone. There's no good news in this story at this point. It adds an additional layer of challenge to a company that didn't need it." Technology analyst Carmi Levy, from The Canadian Press

"The fact that the share price is so depressed is really again a reflection of the fact there is very little confidence at this point in the story from the market in terms of BlackBerry's ability to really turn things around in short order. It's going to be more of a show-me story. BlackBerry is going to have to prove that their new strategy is viable." Craig Fehr, Edward Jones, from The Canadian Press

Twitter boosts price
Twitter Inc. has raised the price of its hotly-awaited initial public offering.

In documents filed today with the Securities and Exchange commission, Twitter said it now projects a range of between $23 (U.S.) and $25 each in its planned offering of more than 70 million shares.

Underwriters can also buy an additional 10.5 million shares.

That price range is a hike from up to $20 earlier.

Twitter will begin trading under the symbol TWTR on the New York Stock Exchange on Thursday.

The best to you each morning?
Shares of Kellogg Co. climbed today after the food giant unveiled its third-quarter results and an overhaul that will slash 7 per cent of its global work force.

Kellogg said today its sales for the quarter dipped slightly to $3.72-billion (U.S.), while profit rose to $326-million or 90 cents a share from $318-million or 89 cents a year earlier.

The company also announced what it dubbed "Project K," a "four-year efficiency and effectiveness program" that includes cutting jobs and is expected to save up to $475-million a year by 2018.

"We are making the difficult decisions necessary to address structural cost-saving opportunities which will enable us to increase investment in our core markets and in opportunities for future growth," said chief executive officer John Bryant.

"These actions will set a foundation for our Sustainable Growth operating principle."

Pre-tax charges are expected to be between $1.2-billion and $1.4-billion.

Kellogg to cut 7 per cent of work force by 2017

Key this week
This week promises to be an interesting one in the markets, both on the corporate and the economic fronts.

Besides Twitter beginning to trade Thursday on the New York Stock Exchange, BCE Inc. and Telus Corp. report third-quarter results, which, as Rita Trichur writes, will shed more light on the battle for wireless subscribers.

Also reporting quarterly results this week are, as Jacqueline Nelson reports, Canada's major life insurers, as well as the two big airlines, Air Canada and WestJet.

Worth watching, too, are Tesla Motors results tomorrow given the high-flying nature of its shares.

Where the economy's concerned, we'll get key readings from the United States on how the economy fared in the third quarter, and how the labour market performed in October. The former comes Thursday, the latter on Friday.

"The data out this week are likely to show the economy slowed in Q3, in part because of rising fiscal uncertainty, and got off to a slow start in Q4, largely because of the government shutdown and lingering concern about another political showdown in the New Year," said senior economist Sal Guatieri of BMO Nesbitt Burns.

Statistics Canada will also be reporting on the Canadian jobs market, also on Friday.

"RBC Economics is looking for the pace of employment gains to clock in at 12,000 in October, virtually unchanged from September," said economists at Royal Bank of Canada.

"In terms of the composition, goods-producing sectors (+7,000) are expected to fare slightly better than services (+5,000), and a 25,000 advance in the labour force is expected to help nudge the unemployment rate higher to 7 per cent," they added.

"In addition, this report will warrant some scrutiny for any signs of spillover impact from U.S. fiscal deliberations, which may have weighed on hiring activity during the month."

Then there's the key European Central Bank meeting, along with that of the Bank of England, on Thursday.

"European Central Bank president Mario Draghi has been outrageously positive recently, regardless of what EU economic data has been thrown his way," said market analyst Alastair McCaig of IG in London.

"With figures seeing a recent downturn, however, it is likely that it will take more than just his willpower to maintain momentum. Speculation has intensified that either a cut in interest rates or, more likely, a relaxation of regulations will be required to assist mainland Europe."

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