Dell the unlikely target for financiers

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A company grappling with a deteriorating core market, a near quarter sales slide in its consumer business and awaiting a proxy filing that will paint an even grimmer picture seems an unlikely target for some of the savviest names in finance.

Yet this is where PC maker Dell finds itself – in the centre of what would be the largest buyout since the global financial crisis.

Blackstone, Carl Icahn, and Silver Lake Partners, which is working with founder and chief executive Michael Dell, all have offers on the table to take the company private. Motivations vary in each camp, ranging from possibly breaking up the company, to squeezing out a special dividend, to orchestrating a full turnround.

It is now up to a special committee of Dell’s board to decide if offers from Blackstone and Mr Icahn will lead to a better bid than the one from Mr Dell and Silver Lake.

“Their raison d’être is getting the best price for shareholders, end of story,” says Charles Elson, corporate governance professor at the University of Delaware. “The bottom line is what’s the best price per share they can get.”

The three rival offers differ in critical ways. Mr Dell and Silver Lake have agreed to buy out all public shareholders for $13.65 a share, valuing Dell at $24.4bn. If the preliminary offers from Blackstone and Mr Icahn do not firm up, this is the best shareholders will receive. However, investors believe more bids are coming. On Tuesday Dell shares traded above $14.50.

Blackstone’s offer of more than $14.25 a share to all investors who want to cash out values Dell at $25bn. It also provides avenues for some shareholders to roll their equity into the new private company, and for some to choose to participate in a “public stub”, which would be traded on Nasdaq.

Mr Icahn, on the other hand, is offering to buy 58 per cent of shares for $15 apiece. The headline price looks favourable to shareholders, but the structure of his deal will also likely require shareholders to participate in a public stub.

Both offers are preliminary, coming as a go-shop period for the company to solicit other bids expired. Now that Blackstone and Mr Icahn have seats at the table, talks are expected to continue for weeks.

Of the two new proposals, Blackstone’s is the one with the highest chance of success, according to people familiar with Dell’s special committee.

That Blackstone has no cap on how many shareholders could cash out is critical. The special committee does not want investors to be forced to participate in a public stub if they do not want to, these people said. Last year it even considered such a scenario, but deemed it unsuitable.

“The Blackstone deal is better,” says one person close to the deal. “Everyone who wants cash can get it.”

But Dell’s special committee is wary of public stubs for good reason. If the public markets are inhospitable to Dell now, there is little reason to think that will change as the company continues its turnround.

And one cautionary tale looms large – in 2007 private equity groups took Clear Channel private, but retained a public stub to allow shareholders to participate in the upside of any turnround. Since then, Clear Channel shares are down almost 85 per cent.

Such a stance by the special committee would seem to rule out Mr Icahn’s proposal as it is currently conceived. Indeed, some people close to the deal say Mr Icahn submitted his proposal only to keep discussions going, and because he thought Blackstone may not submit an offer.

They say he has little interest in taking over Dell, and instead is looking for ways to maximise the value of his $1bn shareholding. If he does secure control of the company, Mr Icahn is likely to press for a large special dividend, people familiar with the situation say. A more likely scenario is that Mr Icahn will team up with a rival bid, and people familiar with the process say he is already considering working with Blackstone.

Mr Dell’s involvement in a Blackstone bid remains a wild card. On the one hand, he has pledged to “explore in good faith” the possibility of working with Blackstone or Mr Icahn, and during negotiations for the original buyout said he would act like “Switzerland,” being a neutral party.

However, Blackstone has explored selling Dell’s financial services unit, worth an estimated $5bn, and has approached former technology executives, including former Hewlett-Packard chief Mark Hurd, about running the company.

These are ominous signs for Mr Dell, who wants to keep the company he founded in his dorm room together, hire sales people and increase spending, and personally oversee its turnround, according to people familiar with his thinking.

Nonetheless, Blackstone appears to be serious about putting forward an offer likely to be deemed superior to the proposal from Mr Dell and Silver Lake.

Blackstone also has held talks with large Dell investors, including its largest outside shareholder Southeastern Asset Management, about allowing them to roll over their stake into equity in a newly private company. This would provide a path for Southeastern and others to benefit in any upside, without forcing them to participate in a public stub.

If the offers from Blackstone or Mr Icahn are deemed likely to lead to a superior proposal, a formal bid will follow. Silver Lake and Mr Dell will have one opportunity to match or top that bid, a process that could take months.

The proposals from Blackstone and Mr Icahn are the latest surprises that extend the saga of a deal once thought impossible. When it first surfaced that Mr Dell wanted to take his company private, sceptics scoffed. No private equity groups would back such a big deal, and no banks would finance that much debt, they said.

Yet nearly two months after Mr Dell and Silver Lake tabled their buyout, almost every big bank on Wall Street is working on the deal, and there is a sense that the real work is only just beginning.

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