Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message| ()  

The battle for Dell (DELL) continues as major Wall Street titans get personally involved in a buyout frenzy for the troubled global information technology company. So far in 2013, shares have already returned some 42% as Michael Dell, Stephen Schwarzman and Carl Icahn all got involved in the battle for the company, making competing offers for the business.

Michael Dell's And Silver Lake's Offer

Halfway through January, rumors surfaced that founder Michael Dell in combination with a private equity firm were to make a bid for the company. Two weeks later things got official when the founder and current CEO and Chairman, together with Silver Lake teamed up to make an offer for the company.

Under terms of the deal, the partnership will pay $13.65 per share in cash for Dell, a 25% premium compared to Dell's offer price of $10.88 before rumors about a possible deal surfaced. The deal values the equity of the firm at around $24.4 billion.

The special committee which was founded has been evaluating the bid and other strategic possibilities for the company. Under terms of the agreement, a 45-day "go shop" period was instigated which ended earlier this week.

Financing of the deal should be rather easy given the fact that Michael Dell himself still owns a 14% stake in Dell's common stock. The founder would furthermore contribute a lot of cash together with Silver Lake and funds affiliated with MSDC Management LP. Major Wall Street banks already guaranteed a rollover of existing debt and technology giant Microsoft (MSFT) provided a $2 billion loan.

Evaluation Of Special Committee

At the start of March, the special committee concluded its rigorous review of the prospects of Dell. The committee evaluated the possibilities for a change in business plan, a leverage buyout, a change in the dividend policy and a potential sale. Yet, the committee concluded that the proposal of Silver Lake and Michael Dell was the best alternative at the time.

Carl Icahn Enters The Stage

A day after the conclusions of the special committee, the group announced that it has received a letter from Carl Icahn. He urged the company to pursue a leveraged recapitalization and to pay a $9.00 per share dividend.

Monday's Go Shop Deadline

On Monday, the special committee announced that it has received two alternative acquisition proposals during the "go shop" period.

Private equity firm Blackstone would like to acquire Dell in a leveraged recapitalization transaction in which shareholders stand to receive cash or stock valued in excess of $14.25 per share. The company states it is a superior offer to Michael Dell's and Silver Lake's offer of $13.65 per share. Blackstone already arranged a financing commitment from Morgan Stanley (MS) and would possibly free up cash by selling the financial services unit to GE Capital (GE) in a $5 billion deal. The private equity firm supposedly attempted to hire Mark Hurd away from Oracle (ORCL) to lead the company.

Activist investor Carl Icahn made an offer for Dell as well, valuing the company at $15 per share. Under terms of the deal, he would make the offer for just 58% of Dell's outstanding stock. The remainder of the shares would continue to trade as a publicly traded company. Icahn, who already owns roughly 4% of the shares outstanding, would advocate a massive dividend payment to shareholders.

Valuation

Dell ended its fiscal year of 2012 with $12.8 billion in cash, equivalents and short term investments. The company operates with $9.1 billion in short and long term debt, for a net cash position of roughly $3.7 billion.

For the full year of 2012, Dell generated annual revenues of $56.9 billion, down 8.3% on the year before. Net income fell by a third towards $2.37 billion.

Trading around $14.34 per share, the market values Dell at $25.1 billion. This values operating assets of the firm around $21.4 billion, which values the assets at 0.37 times 2012s annual revenues and roughly 9 times annual earnings.

Dell pays a quarterly dividend of $0.08 per share, for an annual dividend yield of 2.2%.

And The Winner Is.... The Shareholders

With three competing bids for Dell, shareholders appear to be the winners in the deal. Shares closed on Wednesday at $14.34 per share. All three competing bids value the entire company of parts between $13.65 and $15.00 per share. The three current offers suggest shareholders either stand to lose 3%, break-even, or gain roughly 3%.

Dell's operating performance is deteriorating, but profitability and cash flows remain intact. Furthermore, the company has a rock-solid balance sheet, making it an interesting acquisition target despite the fact that the PC market continues to be in a slump and Dell is losing market share.

Silver Lake and Michael Dell have the support of the special committee formed by the board and have the advantage of Michael Dell's 14% stake holdings. Yet, resistance to the deal is building up after the announcement of the alternatives. Southeastern Asset Management, which owns over 8% of the shares outstanding, called the offer by Silver Lake as being too low. Other large investors including T. Rowe Price and Pzena Investment Management have objected to the deal as well.

At the same time Microsoft and Michael Dell have deep pockets, and the latter stands to lose his job and the company if he loses the battle. The consortium already raised the offer price 6 times, raising the offer by some $4 billion in total. Yet the consortium should raise their offer, as shareholders stand to vote in favor of the two competing alternative offers.

At these levels, investors should expect to roughly break-even on each of the competing offerings, while having a free call option on a potential fierce bidding war. While I would suspect that Blackstone walks away as the first party from the war, the competition between Icahn and Silverlake could be fierce. Icahn can bid more by the use of greater leverage while Dell and Silverlake have capital support from Microsoft and a greater conviction to get the deal done.

In the end, this battle between the major players will bode well for current and potential new shareholders.

Source: Dell - Shareholders Are The Winners If 3 Fight For 1