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Dell Bid at $15 Would Still Be Cheap Buyout: Real M&A

March 08, 2013

Dell Sweetened Bid at $15 Would Still Be Cheap Buyout

The Dell Inc. headquarters in Austin, Texas. Photographer: Sam Hodgson/Bloomberg

As Dell Inc. (DELL:US)’s minority shareholders gain momentum in their push for a sweeter takeover price, Michael Dell could boost the offer to $15 a share and still pay the cheapest multiple among large technology buyouts.

As the board seeks bids topping last month’s $13.65-a-share offer from Michael Dell and Silver Lake Management LLC, the computer maker has attracted interest from Blackstone Group LP (BX:US), Hewlett-Packard Co. (HPQ:US) and Lenovo Group Ltd. (992), people familiar with the matter said yesterday. The interest in Dell’s books along with Carl Icahn amassing a stake and pushing for a special dividend are adding to the opposition from Dell’s two largest outside shareholders.

Dell shares traded (DELL:US) above the current bid by as much as 6.3 percent this week, signaling investors are betting the price tag will ultimately exceed the current $24.4 billion offer. At least five analysts see the buyout group increasing the bid to as much as $14.90 to $15 a share. At $15, Dell still would be going private at about 5.4 times profit, the lowest multiple for a technology buyout larger than $1 billion, according to data compiled by Bloomberg.

“If they want it enough, it’d probably be a good idea to sweeten the offer,” Shaw Wu, a San Francisco-based analyst with Sterne Agee Group Inc., said in a telephone interview. “But there’s only so much debt this company can take before it turns out to be an ugly deal. That’s what limits what investors can expect and what the buyers can offer.”

Stock Trading

Traders have been increasingly wagering on a higher offer. The stock (DELL:US) climbed as high as $14.51 in intraday trading on March 6 and closed yesterday at $14.22, 4.2 percent above the current proposal. Today, Dell shares rose 0.7 percent to $14.33 at 9:42 a.m. in New York.

A representative from Silver Lake declined to comment on whether it plans to raise the offer price. Founder and Chief Executive Officer Michael Dell and the company both declined to comment, according to spokesman David Frink.

The so-called go-shop period runs through March 22, and Dell said this week that it welcomes Icahn and other parties to participate in that process.

While a higher bid is possible, it’s “far from certain,” said Bill Kreher, a St. Louis-based analyst with Edward Jones & Co. who recommends investors hold onto their shares but not add to their positions.

“The currently agreed upon price reflects the difficulties PC makers are facing,” he said in a phone interview. “While I applaud any initiative that allows for a higher offer, I think that Silver Lake spent a great deal of time on this and truly believes Dell’s intrinsic value is below $14.”

Minority Shareholders

While the people familiar with the matter said that Dell’s competitors (DELL:US) Hewlett-Packard and Lenovo are unlikely to bid, Silver Lake and Michael Dell still need to win support from the majority of the company’s other stockholders. Representatives of Lenovo, Hewlett-Packard and Blackstone declined to comment.

The two largest minority owners, Southeastern Asset Management Inc. and T. Rowe Price Group Inc., oppose the current terms and have said $13.65 a share undervalues Dell. If the deal were to fall apart, Jim Chanos, founder and president of Kynikos Associates LP, estimated in a report last month that Dell’s stock could fall to $10 a share or lower. Chanos told CNBC yesterday that he’s been short Dell shares.

According to Louis Meyer, a special situations analyst with Oscar Gruss & Son Inc., the offer may need to be revised to $14.65 to $14.90 a share and an additional $1.75 billion to $2.2 billion of debt “should be manageable.”

Microsoft Loan

Analysts from Jefferies Group LLC, Mizuho Financial Group Inc., Sterne Agee and GFI Group Inc. said a deal may get done at $15 a share, a 9.9 percent increase from the already agreed upon price.

Lifting the offer to “$15 would be the maximum bump that the current consortium would be comfortable paying,” Alfredo Scialabba, a New York-based special situations analyst at GFI, said in a phone interview.

Microsoft Corp. (MSFT:US), which is providing a $2 billion loan for the buyout, has enough cash to increase its contribution, Sterne Agee’s Wu said. The world’s largest software maker had more than $68 billion of cash and equivalents as of December.

“That’s something to watch for, whether Microsoft is willing to commit more,” Wu said.

Peter Wootton, a spokesman for Microsoft, declined to comment.

Cheapest Buyout

A takeover for $15 a share would give Dell an enterprise value (DELL:US) of about $22.5 billion, on a diluted basis and including its $3.69 billion of net cash, data compiled by Bloomberg show. That values Dell at 5.4 times its earnings (DELL:US) before interest, taxes, depreciation and amortization for the prior 12 months, which still would rank as the lowest multiple ever paid in a buyout of a technology company for more than $1 billion, the data show.

According to Jefferies, the odds of a higher offer are now higher than 50 percent. Enough minority shareholders likely would approve a bid of $15 a share, and it would still yield a 19 percent to 21 percent internal rate of return for the buyers, Peter Misek, a New York-based analyst for Jefferies, wrote in a March 7 report.

This week, Icahn asked Dell to declare a special dividend of $9 a share if the buyout is rejected by shareholders, adding that he’ll pursue board seats and a leveraged recapitalization if the company refuses. The activist investor likely would be appeased by an increase to $15 a share, a higher price than would be generated in a leveraged recapitalization, Misek wrote.

Icahn in the last month considered buying a portion of Dell’s shares for about $15 apiece, according to a person familiar with the matter, who asked not to be named because the discussions were private.

“Our conversations with investors lead us to believe that most want a raised bid, but that they are also cognizant of the lack of competing bidders and of the secular headwinds facing Dell’s PC business,” Misek wrote.

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net


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