Is Good Technology Acquisition Good For BlackBerry?

• BlackBerry Ltd BBRY shares have plunged 35 percent year-to-date, slipping below the $8 mark and remaining there since July.
• Macquarie’s Kevin Smithen maintained an Underperform rating on the company, while reducing the price target from $8 to $7.
• The Good Technology acquisition is likely to be highly accretive, with BlackBerry getting a customer list with minimal opex, Smithen said.

BlackBerry had inked an agreement to acquire California-based Good Technology in a $425 million deal. The all-cash acquisition is expected to close in late November, at the end of F3Q.

Analyst Kevin Smithen wrote, “While we like BBRY’s increased scale in the mobile device management (MDM) solutions space, we continue to be disappointed by the company’s lack of organic growth in the software segment.”

BlackBerry’s management expects the GOOD acquisition to be accretive to both EPS and FCF within a year of closing and is targeting $160 million in year-one GAAP revenue from GOOD. Management would not be providing additional details of the transaction or the financial outlook until the deal is closed.

BlackBerry expects it to take a couple of years for the two platforms to be entirely converged into one. Smithen expects the GOOD deal to be “very accretive” since BBRY is “essentially acquiring a customer list with minimal opex” following the first few quarters of integration.

In the report Macquarie noted, “We expect that GOOD will propel seq. software revenue growth ($62m) greater than the absolute decline in services revenue ($27m) in the February qtr. Following that, BBRY should be able to grow revenue sequentially thru F17, albeit slowly, in our view.”

The inflection point in revenue and management’s commitment of keeping $2.5 billion of gross cash on the balance sheet could attract “some value buyers at current levels,” Smithen said, while adding, “…we are still skeptical that BBRY can grow its software revenue organically and begin to generate meaningful EBITDA and ultimately FCF.