Update on Dell’s LBO

Silver Lake Partners IV, Assets Under Management: $7.5bn

Dell Inc. Mkt Cap: $23.61bn

Blackstone Group L.P., Blackstone Capital Partners VI  Assets under management: $13.5bn

Icahn Enterprises L.P. Mkt Cap: $9.18bn

Following our last comment on Dell’s buyout on 16.03.2013, we decided to write a follow-up to elaborate on the recent events concerning the deal. As we have earlier written, following the dissent of shareholders towards the LBO proposed by founder Michael Dell and Silver Lake Partners, a US private equity firm, both Carl Icahn, an activist investor with a stake of 4.52% and Blackstone made preliminary bids and were given access to Dell`s books.

Blackstone

Blackstone announced, through a letter [1] to the computer company`s board on the 18th of April, that they and their partners: Francisco Partners and Insight Venture Partners, were not going to make an official bid and withdrew the initial preliminary offer of $25bn. After conducting weeks of due diligence, Blackstone admitted that they had concerns regarding the slowing PC business with Dell reporting a 14% market decline in PC volume sales in the first quarter of 2013, the lack of in-house technology expertise, and the cash that Dell held overseas. The revised estimated operating income from $3.7 bn to $3bn were the final nail in the coffin for Blackstone’s offer. The markets reacted to the news by pushing the share price below $13.65, the bid price by Michael Dell and Silver Lake. This left Carl Icahn and his partner Southeastern Asset Management (SAM) as the only competing offer for the company.

Carl Icahn Enterprises and Southeastern Asset Management

As described in the previous newsletter, this syndicate bid $15 a share for up to 58.1% of the company leaving a stub of the listed company. On the 10th of May, Dell disclosed to regulators that they had received a letter the day before declaring that Carl Icahn Enterprises and SAM, would both vote against the initial deal. The two parties, controlling 14% of the company`s shares, declared that they believed the price Silver Lake and Michael Dell were offering ($13.65 per share) to be far below the real value of the company.

In addition to this, the parties announced a bid for the company, where investors would receive shares worth  $1.65, and $12 in cash or additional shares (7 new shares might be issued for each current share); the proposal seems identical to Michael Dell’s bid of $13.65. However, shareholders would have the opportunity to either sell the diluted shares, or stay on as owners of the company and  therefore share interests with the syndicate. Icahn stated that this bid is better than the bid by the founder and Silver Lake, as it gives the opportunity to participate in the future turnaround of the company. Icahn said in an interview on Bloomberg [2] that Dell might be expanding in other businesses through mergers and acquisitions thus implying that the $1.65 residual value of the shares would yield a good return as even with a very low P/E of 4x, the shares would trade at $2.8 and leave shareholders ahead.

The syndicate also warned the board about what would happen if the bid was not approved by the Special Committee. Should the special committee turn down Icahn and Southeastern, the two investors will seek to persuade other shareholders to vote down Mr. Dell’s offer. They will try to replace the company’s board at an annual investor meeting soon afterward.

The share price closed at $13.45 on Friday.

Major deal differences

Icahn`s deal only requires $5.2 billion in new debt vs. 16 billion for Michael Dell and Silver Lake’s proposal. Another attractive point is the large special dividend proposed by Icahn which will not deprive shareholders from owning Dell’s stock. The bid proposed by Michael Dell and Silverlake is for a 100% stake in order to completely take the company private while Icahn and SAM will keep a stub (around 40%) on the stock exchange and therefore share growth opportunities with the rest of the shareholders. As stated in the interview, Icahn has also announced that the founder will not lead the company if Icahn`s bid goes through.