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BlackBerry's WhatsApp valuation seen derailed by BBM

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For BlackBerry investors cheering the prospect of a sale of its BBM messaging service after last week’s $19 billion deal for WhatsApp, the waiting may be the hardest part.

BlackBerry shares have rallied 18 percent since Facebook agreed to pay $42 per user for WhatsApp's mobile-messaging application, implying a valuation of as much as $3.6 billion for BBM. The messaging service isn't likely to find a buyer willing to pay close to that much because it lacks the scale of WhatsApp with a user base one-fifth the size, BGC Partners Inc. said.

Chief Executive Officer John Chen said yesterday that he’d eventually consider spinning off or selling BBM once he’s built it into a stronger competitor. Even if the app doubled its growth rate of 2.8 million users per month, it wouldn’t reach WhatsApp’s current size until 2019, according to data compiled by Bloomberg. BlackBerry, which failed to find a buyer last year, may be better off making a last attempt to sell the entire company to Microsoft Corp., Hudson Square Research Inc. said.

“The outlook is not bright,” Daniel Ernst, a New York-based analyst at Hudson Square, said in a phone interview. BBM’s user base currently isn’t “in the ballpark of what would be interesting to a global Internet company.”

Lisette Kwong, a spokeswoman for Waterloo, Ontario-based BlackBerry, declined to comment beyond Chen’s remarks on the prospects for selling the messaging service.

BBM potential

“The potential is going to be huge” for BBM, Chen said in a Feb. 25 interview with Bloomberg Television at the Mobile World Congress in Barcelona. “Until we get to the point that we can showcase that potential, it is a bit too early to think about getting our $19 billion.”

BlackBerry has added about 25 million BBM users since May to reach 85 million this month, according to company statements. Should the app maintain that growth rate, it would rival WhatsApp’s current 450 million users by January 2025, data compiled by Bloomberg show. Doubling the pace to 5.6 million each month makes BBM the size of WhatsApp by August 2019 and the size of Tencent Holdings Ltd.’s WeChat, with 272 million users, by December 2016.

“There are benefits of scale in this area, so you’d probably pay a lot less for Blackberry’s BBM subscribers than you would, say, a WhatsApp,” James Cordwell, a London-based analyst at Atlantic Equities LLP, said in a phone interview. For potential BBM suitors, the “biggest question would be, can they hold onto those users or are those users going to migrate over to a larger service?”

WhatsApp growth

More than 1 million people are signing up for WhatsApp each day, and the service is on track to reach 1 billion users in the next few years, Facebook CEO Mark Zuckerberg said last week after the deal was announced.

“WhatsApp has five times the scale, roughly, of BBM and it’s growing at a fast clip,” Colin Gillis, a New York-based analyst at BGC Partners, said in a phone interview. “The No. 1 company in a space tends to command a higher premium.”

Rakuten Inc., a Tokyo-based online retailer, earlier this month paid $900 million for Viber, a similar mobile-messaging service with more users than BBM. That deal implies a lower value for BBM than the $3.6 billion that’s based on the WhatsApp acquisition, data compiled by Bloomberg show. BlackBerry had a market value yesterday of $5.6 billion.

User strength

While selling BBM now could give BlackBerry shareholders an immediate reward, the company can’t risk parting with one of its best assets, said Brian Blair, a New York-based analyst at Wedge Partners Corp. BlackBerry reported losses in six of the last eight quarters and revenue in the most recent period was the lowest since 2007, according to data compiled by Bloomberg.

“It’s not in the best interest of BlackBerry as a company,” he said in a phone interview. “What they should learn from WhatsApp and other communications platforms is that the strength is in getting as many users as possible.”

With BBM so far behind peers, BlackBerry must find a niche market to lure more users, according to Todd Coupland, a Toronto-based analyst at Canadian Imperial Bank of Commerce.

Chen, who became CEO in November after Fairfax Financial Holdings Ltd. terminated a $4.7 billion takeover proposal, hasn’t said he’s looking to enter an arms race for users with WhatsApp and Facebook. He’s instead targeting the bankers, lawyers and other professionals who have stayed loyal to BlackBerry because of the security of its e-mail networks and its Qwerty keyboard-equipped phones. Yesterday, Chen unveiled BBM Protected, a version of the instant-messaging service with enhanced encryption.

Business customers

“Nobody has a secure messaging infrastructure, and we’re the only ones who have it,” Chen said in an interview. “It’s important that we showcase and use that as a differentiator into the thousands and thousands of enterprise customers.”

BlackBerry has said it’s looking to develop BBM channels — essentially chat rooms devoted to specific themes — that could carry advertising as a way of creating new revenue streams for the messaging service. The company has the potential to charge business customers for using the service, Tim Long, a New York-based analyst at Bank of Montreal, wrote in a Feb. 20 report. WhatsApp charges $1 a year after one year free.

BBM could command a higher price per user because enterprise users are more valuable, said Neeraj Monga, an analyst at Veritas Investment Research Corp. in Toronto.

Even with BBM, BlackBerry is projected to continue losing money through at least 2016, according to analysts’ estimates compiled by Bloomberg. Revenue is forecast to tumble 39 percent in the fiscal year ending February 2015, the data show.

Whole takeover

While Chen has made some progress since taking the helm, “nothing is really turned around in terms of the business,” said Coupland of CIBC.

BlackBerry’s focus on security and enterprise customers would still be a good fit for Microsoft, and a purchase of the entire company would be a relatively small acquisition for the $312 billion software maker, said Ernst of Hudson Square. With shares of acquirers rallying after deal announcements lately, Redmond, Washington-based Microsoft should consider a takeover now, he said.

Tony Imperati, a spokesman for Microsoft, declined to comment on whether the company is interested in buying BlackBerry.

A takeover of the entire company may be more likely than a sale of the BBM unit, said David Cockfield, a fund manager with Northland Wealth Management in Toronto who helps manage about C$270 million and owns shares of BlackBerry.

“BlackBerry’s messenger has been around and nobody’s rushed up and made them an offer,” Cockfield said in a phone interview. As for the entire company, “if it looks like it’s going to survive -- and it’s beginning to look that way -- then I suspect somebody may come in and make a bid.”

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