Dell‘s (NASDAQ:DELL) shareholders are scheduled to meet on July 18, to vote on $24.4 billion buyout proposal by CEO Michael Dell and investment firm Silver Lake. While Dell’s management backs this proposal, the shareholders can also vote for the competing offer from activist investor Carl Icahn that seeks to keep Dell public. Carl Icahn led consortium values each share of Dell at $24, a price difference of 73%, compared to $13.65 offer from Michael Dell-Silver Lake. In this article, we will look at offers made by each consortium. Additionally, we will try to assess which proposal will be beneficial for Dell’s shareholders.
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In recent years, Dell has reported double-digit decline in revenues for its core PC sales business due to decrease in demand, stiff competition and lower spending by clients. Citing this decline, CEO Michael Dell argued that Dell needs to restructure its business and focus on high margin products and services that have recurring revenue streams. Since the investment outlay for restructuring Dell is expected to be high, Michael Dell proposed to take the company private. As a result, a special committee was formed at Dell in August 2012, to consider all possible alternatives that would unlock value for a shareholder. The committee contacted 21 strategic and 52 financial buyers, but a better offer did not materialize. The management at Dell, therefore, has recommended its shareholders to vote for the proposed privatization of Dell.
Michael Dell-Silver Lake Proposal
The consortium led by CEO Michael Dell proposes to take the company private in a $24.4 billion deal that values each share of the company at $13.65, a 25% premium over Dell’s price on January 11, 2013. The deal will be financed through a leverage buyout in which 90% of the funding will come from debt taken against Dell’s assets and cash on books while the remaining 10% would be pooled in by the consortium as equity. The consortium proposes to transform Dell into an end-to-end information technology solutions provider by focusing on converged infrastructure solutions, cloud solutions, application development and consulting. It also states that executing the new strategy would require at least three to five years and would require additional investments that could weaken earnings for two or more years. ((Special Shareholders meeting, May 31st 2013, www.sec.gov))
Carl Icahn- Southeastern Asset Management Proposal
The Carl Icahn led consortium proposes to keep the company public and pay a one time dividend of $12 per share. The payout from this transaction adds up to $21 billion that will be funded through cash on Dell’s book and additional debt of $5.2 billion. The consortium holds 13% stake in Dell and in its proxy statement has urged shareholders to vote against the privatization proposal.  In its letter to the board, the consortium has stated that the estimated value of Dell is close to $24, which is substantially higher than $13.65 per share on offer.  The consortium believes that even after paying $12 per share dividend, the shareholders can still make additional money if and when the company turns around.
Dell’s shareholders will vote on both the proposals on July 18. In case the privatization proposal falls through, we expect the stock price of the company to plunge to pre-deal levels of $9. Additionally, Dell will have to pay $450 million to Silver Lake as termination charges. According to our estimates, Carl Icahn’s proposal will leave the company cash strapped and in need of additional investment for funding its new business ventures. We believe that shareholders are likely to vote for Michael Dell-Silver Lake’s proposal, as it not only shifts the restructuring risk to the buying consortium, but also frees up cash that can be invested elsewhere for higher returns. The $13.65 offer to shareholders is tempting and it remains to be seen whether Carl Icahn’s offer will sway shareholder’s decision in its favor.
We currently have a $12.50 Trefis price estimate, which is ~10% below the current market price.Notes: