On October 15th I wrote an article about the troubled Waterloo, Ontario-based smart phone maker Blackberry’s demise.
You can read it here if you’re interested.
Blackberry’s shares fell 16% to $6.50 after Fairfax Financial abandoned their plan to buy Blackberry for $4.7 Billion. Instead, Blackberry plan to raise $1 billion in convertible debt of which $250 million is to be invested by Fairfax Financial as their lead investor.
This is a big shortfall from the $4.7 billion in cash that was going to be added to their balance sheet from the original Fairfax deal.
Their cash burn rate has also come under scrutiny, funnily enough my last article suggested that their comeback may be weighted down by their cash burn rate: today, Bloomberg stated that $500 million of cash was ‘burnt’ during the last quarter, which is a large chunk of their $2.6 billion cash pile along with a short-term financing commitment of $2.9 billion. Short term financing is recognized as a short-term liability on a balance sheet, with payments falling due within 12 months, and is used as a vital part of a business’ working capital cycle and as a short-term cash flow relief.
New CEO
A new interim CEO, John Chen, 58, has been appointed to take over Blackberry Ltd until a permanent CEO has been found. Much of the media has welcomed this news because of his favorable career history: he managed to turn around Sybase Inc in 1998 after they were announcing a major restructure. He then sold it to SAP AG in 2010 for $5.8 billion: over 6 times its value the company was when he began his post. He also sits on the Board of Wells Fargo & Walt Disney.
Chen will tackle Blackberry’s future from a different angle, rather that preparing the company for a sale, he will try to overhaul the business to add value and to complete effectively in the marketplace in the long run.
The biggest challenge that Chen will, I think, face is not only getting customers to come back to Blackberry, but to also get suppliers trusting in the business again.
Stakeholder Trust Diminishing
In my last article, I wrote that T-Mobile US, Blackberry’s largest carrier has planned to drop stocking Blackberry handsets in their shops across the US, as well as a major supplier, Jabil Circuits Inc has ceased their relationship with BB. Although they didn’t give a specific reason about why their relationship ceased, it was obvious that it was speculated that BB’s finances will be put under strain.
Any supplier who does choose to do business with the phone maker will probably not offer very good credit terms for a while (all current suppliers may need to be renegotiated with) and will affect their cash conversion cycle, their cost of capital will be relatively large, and their remaining unsold inventory will either need to be written off (after a $950 million write down) or sold at a heavy discount.
The $1 billion raised in convertible debentures will offset the inventory write down loss which is a good start, but a sustainable cash burn rate, making use of their current patients, and the removing of all ‘toxic’ assets as well as attaining a good cash conversion cycle will all go a long way to a sustainable, competitive business.
Source: Bloomberg.com
Contact Todd Gilbey at gilbey.todd@googlemail.com
Todd Gilbey 