Blackberry Ltd (BBRY): Abandons Sale – Does It Makes Sense?

Attention all BlackBerry investors! There is no sale, only cash injection.

Shareholders of BlackBerry Ltd. (NASDAQ: BBRY) (TSE:BB) woke up today with a sense of shock as the Canadian company called off its sale process. Instead, it believes it can still turn the company around with the help of a $1 billion investment from Prem Watsa's Fairfax Financial Holdings and other institutional investors.

The company also said it would replace its chief executive, Thorsten Heins with John Chen on an interim basis. Chen was as the former chairman and CEO of Sybase Inc. a database software company that SAP AG bought in 2010. Chen, who joined the private equity group Silver Lake as senior adviser last year, will be handling Heins' office till a new Chief Executive Officer is appointed.

The latest development comes as Fairfax Financial, which tentatively agreed to buy BlackBerry for $4.7 billion in September, struggled to raise financing for the deal. The $4.7 billion for all of BlackBerry was very large compared to Fairfax's reported total assets of $36.1 billion and shareholders' equity of $8.6 billion as of June 30, 2013.

Under the new deal, BlackBerry will raise $1 billion via sale of convertible debentures. The 6 percent 7-year unsecured subordinated debentures would be convertible into common shares of BlackBerry at a price of $10.00 a share, a 28.7 percent premium to the closing price of BlackBerry common shares on Nov. 1, 2013. If all of the $1 billion of debentures were converted, it would represent about 16 percent of the share count.

Investors have an option to buy up to an additional $250 million worth of debentures within 30 days following the closing. If this happens, the common shares issued upon conversion represent approximately 19.2 percent of the common shares.

Along with Fairfax's investment, chairman and CEO Prem Watsa (a major shareholder) will join BlackBerry's board.

BlackBerry is the firm that invented the smartphone market, but it is now at the rec! eiving end. It is sad, but an undeniable fact. BlackBerry, which has been losing share to Apple's iPhone and Google's Android-based handsets such as Samsung Galaxy brand phones, had been pinning its hopes on its new line of BlackBerry 10 devices. Those devices got only a lukewarm response.

Due to waning sales, the price of BlackBerry Z10 model was cut to $49.99 while the device had originally gone on sale in the U.S. in March for $199.99 with a two-year contract. In September, BlackBerry wrote down nearly $1 billion in unsold inventory of Z10 and announced 4,500 layoffs.

The company reported a second quarter loss of $965 million while Microsoft's Windows Phone operating system has surpassed BlackBerry for third in market share, behind Apple iOS and Google Android.

Global demand for high-end smartphones may be decelerating and driven by replacement cycles and product cycle driven with the focus now shifting to the mid-tier in emerging markets, where BlackBerry faces stiff rivalry from cheaper Chinese Android variants, Samsung and Nokia.

As a result, the concerns of BlackBerry would quit the handset market is growing following a huge net loss in the second quarter, and given that the handset market requires significant scale to be competitive. Reuters says that the company is not planning to quit the handset market.

Though the strategy to move away from consumer products may not prove successful, it doesn't seem a child's play either for BB with consumers already accustomed to iOS and Android. These two platforms have become synonymous with users as the operating system and ecosystem matters.

In this environment, it would have been a wise call for BlackBerry to sell itself and turnaround the company away from the watchful eyes of Wall Street. However, this didn't happen, and investors who have been waiting for months hoping to see a sale were terribly disappointed. No wonder, shares plunged as much as 18 percent on Monday.

All the issues surrounding BlackBerry co! st invest! ors billions as the market capitalization of the company plunged to $4.8 billion from $82 billion at its peak in 2008. It is a case where the shareholders are suffering at the expense of some poor management strategies and execution. Management is getting their pay though. In case you don't know, the outgoing Heins may get about $20 million in a compensation package.

So, what to do with the stock? The answer is simple – exit the stock as there are no signs of near-term improvement in fundamentals and it may get worse in the coming quarters.