Shares of one-time smartphone leader BlackBerry (NYSE: BB) stock soared 16% through 11:40 a.m. ET Monday morning after the company announced it will sell its Cylance endpoint security assets to private cybersecurity operator Arctic Wolf.
With its smartphone business out of the picture, BlackBerry has morphed into a specialist in software for cyber and Internet of Things (IoT) applications. It’s the former business that interests Arctic Wolf, which will pay effectively $160 million to acquire it.
Arctic Wolf will trade 5.5 million shares of its own privately held stock (presumably worth about $40 million), and also pay $80 million in cash at closing, to acquire Cylance. Approximately one year after closing, Arctic Wolf will make a final payment of $40 million.
It’s not 100% clear what Arctic Wolf will get in return. BlackBerry notes that it will be keeping its “Secure Communications portfolio of businesses,” which are part of the cybersecurity division that generates $378 million in annual revenue. How much revenue BlackBerry loses with Cylance is therefore the big question for investors. If Cylance is still generating $189 million or so annually (as reported in 2021), the valuation of the sale might be 0.8 times sales. If Cylance generates the bulk of BlackBerry’s sales today, then the valuation on this sale could be as low as 0.4 times annual sales.
Either way, considering BlackBerry stock itself sells for 2.5x sales, this suggests BlackBerry isn’t getting a great price. After the sale, most revenue will come from licensing fees and IoT: about $475 million annually.
As a result, investors are left wondering how much of BlackBerry will actually remain after the sale. We’ll probably have to wait till next earnings report to learn the answer to that.
BlackBerry already isn’t a profitable company, losing $138 million over the last 12 months, and reporting $81 million in negative free cash flow. Selling off a big part of its business at an apparently low P/S valuation doesn’t seem to me likely to improve the company’s prospects very much.
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