Wednesday, April 3, 2013

The Dell Buyout

This Barron's article provides a good summary of the battle that has emerged over Dell (DELL):

Barron's: Michael Dell's Folly

From the article:

It doesn't look like Michael Dell, founder, chairman, and CEO of Dell, will be able to steal his company from public shareholders for just $13.65 a share now that superior preliminary offers for Dell have been submitted...

Both competing proposals from Blackstone and Icahn are essentially a leveraged recapitalization that appear to allow some Dell shareholders -- though more details are needed -- to at least an extent remain invested if they choose to do so. If that's the case, investors should be able to cash out at whatever the final price agreed upon or have the option to remain invested.

Well, at least based upon what is known today. These deals could fall through and there's plenty of time for the terms to morph into something else altogether.

When it comes to allowing Dell shareholders to remain invested after the deal is done, it's the Icahn offer that seems to be the most straightforward. The Blackstone offer also seems to allow investors to remain invested, but apparently there will be some kind of "cap".

Need to see the fine print to know what that really means.

The original proposal from Michael Dell and Silver Lake would force all investors to sell but that, of course, could change in a possible counter offer.

In this CNBC video, Leon Cooperman makes a moral argument against forcing investors to sell.
(Some of Cooperman's comments can also be found in this New York Times article.)

More from the Barron's article:

"Having the choice of cashing out or staying in is hugely superior to what Michael Dell had to offer," says Richard Pzena, co-chief investment officer at Pzena Investment Management, which owns about 1% of the company.

Those that decide to remain shareholders will own a company with far fewer shares outstanding but also quite a lot more debt.

When it's all said and done who knows whether some Dell shares remain publicly traded. There's likely a long way to go in this process and more than a  few twists and turns.

The article suggest shares outstanding would likely fall from around 1.8 billion shares outstanding to one billion or maybe less.

That should boost earnings per share since borrowing costs are likely quite a bit less than the company's earnings yield.

Of course, the trajectory of earnings is at least somewhat difficult to gauge.

In any case, the additional debt involved in all the proposed deals (including the original buyout offer from Dell and Silver Lake) certainly adds additional risk if things business-wise were to more rapidly deteriorate.

Added leverage naturally amplifies the not only the upside but also the downside.

Barron's has covered the developments of this Dell deal well. Early on, while many seemed to expect the original Dell buyout offer to go through relatively unchallenged, they did not.

Barron's from the start was suggesting otherwise. They even brought up the idea of a leveraged recapitalization and that an activist investor might get involved not long after the initial offer was announced. Barron's also contrasted the way that Berkshire Hathaway (BRK.A) operates with this proposed deal that seemed to be at the expense of shareholders:

Some founder-CEOs like Warren Buffett of Berkshire Hathaway (BRK.A) enjoy getting rich along with their shareholders.

In this separate Barron's article, they added this about the valuation:

No major company has ever gone private so cheaply. Most leveraged buyouts are done for double the Dell transaction valuation.

It's worth noting that one of Dell's larger shareholders, Southeastern Asset Management, thinks Dell is worth far more per share than any of these offers and advocates "a public 'stub,' which would allow public shareholders to remain investors in Dell’s future."

Here's Southeastern's valuation summary from the letter* that was sent to Dell's Board of Directors:

Valuation Summary
(per share)
Net cash (1)
DFS (2)
Acquisitions since 2008 (3)
Server Business (4)
Support and Deployment (5)
PC Business (6)
Software and Peripherals (7)
Unallocated Expenses (8)
DFS value embedded in segments (9)

Obtaining the necessary financing at that kind of price, to say the least, would be a tall order. Still, Southeastern certainly seem unlikely to be cashing out unless the price were to be raised materially.

Icahn's valuation isn't much lower at $ 22 per share. It's understandable that these investors are coming up with pinpoint numbers since it's part of an ongoing negotiation. Yet, in reality, judging per share intrinsic value can never be that precise. It's necessarily more of a range of values.

Seems rather unlikely this will be resolved anytime soon.


Some related articles:
Barron's - Dell Deal: The Same as Insider Trading
Fortune - Who is Dell's board working for?
New York Times - 2 Rivals Complicate Deal for Dell
WSJ - Everything You Need to Know About the Dell Offers

Very small long position in DELL established at lower than recent market prices

* See Schedule III of their SEC filing.
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