According to the Wall Street Journal, Silver Lake Partners is in discussions with Dell for a leveraged buyout at around $13 to $14 a share. The buyout group would include the private-equity firm, at least one other investor such as a pension or sovereign wealth fund, and Michael Dell himself.
First of all, an LBO offer would not succeed at such a low price. If it were successful, it would probably be the steal of the century. And if the LBO group (Silver Lake Partners, Michael Dell, pension or sovereign wealth fund) even try to pull a stunt like this off, I am sure that immediately we will see rival offers from other LBO firms on the spot.
So assuming my logic is correct, if an LBO was to be successful, it would have to be north of $20 per share. If that's the case, then the LBO group would need to fork up about $35 billion. So for arguments sake, let's say they put up $5 billion of their own money to get bank financing - will the numbers work?
Dell (NASDAQ:DELL) currently has about $35 billion in total liabilities. If we add another $30 billion to its total liability burden ($35 billion for the total price minus $5 billion in initial equity), then its total debt liability burden (whether debt or something else) would be about $65 billion.
Dell's yearly revenue is currently about $63 billion. So my initial thoughts are that the company would be in a big pile of debt with no room to maneuver. I personally almost never consider buying a stock that has total liabilities 1x sales.
Total liabilities aside, Dell's total debt burden is about $9 billion. So if we add $30 billion to that, it will total $39 billion. If we assume that the banks would charge 6% interest on the loans they provide, then the interest on that pile of debt would be about $1,8 billion per year without equity repayments. Considering that Dell paid $900 million for dividends and share repurchases this year, I would say the deal is borderline possible, if Dell would squeeze another billion plus from the company.
However, why would the banks finance the deal at only 6%? This is not a deal without long term risk. As such I think they will ask for much more than 6%. But if the banks ask for a higher interest rate, then the deal as such is probably not doable. Either the LBO group would have to put down more equity or hope to do the deal at $13-$14 a share. But since I rule out $13-$14 as a possibility, then the deal as described is probably not doable altogether.
Why does Michael Dell want to take over the company?
It would seem strange that Michael Dell would even contemplate such a move. He is already one of the richest men in America thanks to the company and its stock. Surely it can't be for the money. Is it an ego thing? I don't know, but whatever it is, he is being unjust to the stockholders of this company who have seen the stock tumble from a decade ago.
Then again you can't blame Michael Dell if the market put such a ridiculous multiple on the company many years ago, but nevertheless, It's not fair to long-time shareholders to be taken over at $14 per share. The current share price will go much higher longer term if the company stays on its current strategy. That strategy being one of relying less on PCs and betting more on services like IBM (NYSE:IBM) has done.
The deal as stated is bad for shareholders
The problem with this LBO proposal - to the extent that it is carried out - is that it's not a good deal for shareholders. Shareholders would be much better served if Dell's board rejected any offer below $20 per share and the company carried on as is. I reviewed DELL a while ago (please consider: Snapshot Of Dell's Q3: Conclusion - Buy) and concluded that the company was doing all the right things and was an excellent buying opportunity for long term minded investors at these levels. If indeed a deal was done at the $13-$14 range, then that would shortchange shareholders. And because the board has a fiduciary duty to shareholders, I am betting that no deal will be done at current levels.
Since I rule out a deal in the $13-$14 range, it will either happen north of $20 per share or it will not happen. That is positive for current shareholders.
Since the LBO group even contemplated such a move, it means they seem to think they will make a good long-term return on their money. That is also a bullish sign for the company and the stock at current prices.
If nothing happens, longer term shareholders will still win, because the company is doing all the right things, and that should push the stock up long term. If nothing else, the dividend and the stock repurchases alone are worth holding the stock at these levels.
Whatever happens, current shareholders only stand to win from these levels and I see nothing negative about the proposed deal or the company itself that can drive the stock much lower.