BBRY: Unlikely Lenovo Could Fund a Purchase, Says Pac Crest

Responding to an interview published yesterday with Lenovo (0992HK) CEO Yang Yanqing in French paper Les Echos, which sparked some take-out rumors for BlackBerry (BBRY), Pacific Crest analyst James Faucette today reiterates an Underperform ratio on BlackBerry shares, writing that with an $8 billion market capitalization, an entity like BlackBerry would be difficult to engineer for an $11.2-billion company such as Lenovo.

The deal doesn't make sense financial, even if it were helpful to Lenovo, writes Faucette:

There has been rampant speculation based on the above comments that Lenovo may be an interested buyer in BBRY. While many companies/managements may do surprising things in pursuit of growth, we do not believe that Lenovo�s acquisition of BBRY would make much sense, at the very least from a financial perspective [�] The companies are too similar in size, BBRY would be much more expensive than previous Lenovo acquisitions, and it is not clear to us how Lenovo could engineer such a transaction [�] And that is if Lenovo management could come up with the market justification to pursue such an acquisition [�] Lenovo�s previous acquisitions have been much, much smaller. While many investors like to point to Lenovo�s acquisition of IBM PC business as evidence that it has the appetite and ability to do larger deals, the reality is that the IBM acquisition was actually quite small compared to what an acquisition of BBRY would be. At the time, Lenovo paid ~$1.25B in cash and assumed about $500M in debt to acquire a business that was doing about $9B/year in revenue.

Lenovo has about $4.1 billion in cash, and if it were to retain its traditional minimum cash-to-revenue rate of 7%, it would need to hold onto $2.4 billion of that, leaving only $1.7 billion to fund any deals.

BlackBerry shares today have given up some of yesterday's double digit gains, falling 56 cents, or 3.5%, to $14.34.

I would note that Faucette is not the only one who has been skeptical. Yesterday, Jefferies & Co.'s Peter Misek, who has a buy rating on BBRY shares, wrote, “we reiterate our view that this is unlikely,” meaning, a full acquisition, “due to U.S. security concerns and we be,over that Lenovo taking over BlackBerry's hardware business would face similar pushback.”

However, he adds, “We believe it is more likely that Lenovo and BlackBerry are in talks to form an alliance or JV where they co-develop some products for Lenovo to sell through its corporate channels, similar to what Lenovo did with EMC.”