Wednesday, March 6, 2013

A Leverage Recap: Dell Gets More Interesting

A Leverage Recap: Dell Gets More Interesting

Southeast Asset Management has a new ally in an effort to block Michael Dell’s and Silver Lake’s takeover of Dell for $13.65 per share.  It appears that Carl Icahn has acquired 6% of Dell’s stock[1], which gives Mr. Icahn an even bigger voice in the takeover battle, since Mr. Dell has agreed not to vote his 12% stake as part of the merger agreement with the company.

Mr. Icahn raises a fair point, although it is a point that the independent committee of Dell directors probably explored some weeks ago.  He’s contending that the existing public company should go out and borrow $10 to $15 billion, increasing Dell’s leverage and then turn around and pay shareholders a huge dividend.  This transaction would, in effect, put the existing shareholders in the position that Mr. Dell and Silver Lake hope to assume.  However, Dell would still be a public company.

In my experience, banks seem more comfortable applying higher levels of leverage on private companies managed by buyout firms than they are in supplying credit to public companies.  I suspect that the banks have greater confidence in a company owned by a private equity firm.  Perhaps they believe that the PE owner will take whatever steps are necessary to service the debt.  Moreover, the banks may also think that the private equity sponsor is more likely to support the deal with additional capital if the company founders.

A few weeks ago I wrote about Quintiles, which is going public again.  Back in 2002-2003, the independent directors of Quintiles went through the same exercise of weighing a leveraged recap against a management-led buyout.  After raising the offer, the buyout eventually won out.  As in the Quintiles case, the independent directors at Dell are in a tough spot.  They can get firm estimates about how much banks might be willing to lend, and how large a special dividend they might be able to pay out.  However, they can only get a range of estimates about how much the “stub” equity would be worth after the leverage is applied and the special dividend is paid.

The special committee is telling us it thinks the total price of a leverage recap is less than $13.65, and Mr. Icahn thinks otherwise.  He certainly wouldn’t have purchased the stock around the takeover price, if he didn’t think he could get substantially more for his shares of Dell.     In my view Mr. Icahn’s entry into the fray suggests we will see a higher price from Mr. Dell.  To get the deal done, Mr. Dell may have to find additional equity (Mr. Icahn, perhaps?) and dilute his own interest.  If the deal falls a part, Mr. Dell and Mr. Icahn will have two things in common: egg all over their faces and a sharp pain in their wallets.


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