Icahn Asks Investors to Make Big Bet on a Debt-Laden Dell

By Aaron Ricadela, Cristina Alesci & David Carey
Billionaire Carl Icahn, seeking to scuttle a buyout led by Silver Lake Management LLC, is askingDell Inc. (DELL) investors to bet on a computer maker beset by rising competition, tumbling demand and a bigger debt load. 
Icahn’s deal, which would maintain Dell as a publicly traded company, includes $12 share that investors would be paid in cash or additional Dell stock, according to a filing. The payout would dilute existing Dell shares, which Icahn said would have a value of at least $1.65 apiece. That compares with $13.65 a share in cash offered by Michael Dell and Silver Lake.

To prevail, Icahn will have to persuade those investors who want to keep an equity stake in Dell that fresh leadership can do a better job playing catch-up in cloud computing while managing greater debt and combating the biggest sales decline in the history of personal computing.

Investors who don’t want Dell stock face bigger risks under Icahn’s plan. While they would receive $12 a share, there’s no guarantee that they’ll be able to find a buyer willing to pay $1.65 or more for their existing holdings -- a prospect that may make the Silver Lake-Dell bid more alluring.

“We don’t see this as a superior proposal” to the buyout from Silver Lake and Michael Dell, Louis Meyer, a special situations analyst at Oscar Gruss & Son Inc., said of Icahn’s plan. “Most shareholders will be glad to take the LBO.”

Dell rose 1 percent to $13.45 at the close in New York. The shares have climbed 33 percent this year, and the company has lost more than $100 billion in market value since the stock’s peak in March 2000.

Superior Offer?

Icahn and Southeastern Asset Management Inc., his partner in the deal, own a combined 13 percent stake and say their proposal gives investors a chance to benefit from potential future growth at Round Rock, Texas-based Dell.

“Mathematically, there is no question it is superior,” Icahn said in an interview on Bloomberg Television. “You have a choice of getting $12 and still owning Dell, which has great potential.”

In a letter to Dell’s board, the group said that each share would be worth more than $1.65 under its scenario -- $1.98 to $5.35 -- assuming the remaining public portion of Dell trades at four to six times projected annual pretax earnings of 50 cents to 89 cents a share.

“It’s an upgrade from Dell’s offer,” said Donald Yacktman, whose Austin, Texas-based firm, Yacktman Asset Management, owns almost 15 million Dell shares. “It gives investors the chance to choose what they want.”

Adding Debt

Still, owning Dell hasn’t been such an attractive option for shareholders in recent years. The shares were trading above $30 in 2007 after Michael Dell returned as CEO following a hiatus, yet they have been sinking amid plummeting demand for PCs and accelerating competition for selling the data-center products and services Dell has opened its coffers to acquire.

Icahn’s proposal would load $5.2 billion in new debt onto a company that remains publicly traded, hampering its ability to spend on the research and development and deals needed to become more formidable in enterprise computing, said Jeff Fidacaro, an analyst at Monness Crespi Hardt & Co. in New York.

“By increasing the debt and paying out a special dividend, you’re taking away some of the flexibility to diversify away from PCs,” said Fidacaro, who has a neutral rating on the shares. “I’d prefer they focus investments on executing the transition rather than providing immediate return today.”

Falling Sales

Icahn also said he’d look to replace founder and CEO Michael Dell if he prevails.

Dell’s board is predicting another year of lackluster growth as demand for PC ebbs, underscoring the urgency behind the company’s decision to be taken private, documents filed in March showed.

Sales for the year ending next January will slip to $56.5 billion, and Dell’s PC business will shrink by $10 billion over four years, according to projections in a proxy statement filed with regulators.

Icahn’s latest proposal doesn’t contain anything that makes the Michael Dell and Silver Lake group currently inclined to raise its bid, people with knowledge of the matter said.

Whatever the response from Silver Lake, Icahn isn’t planning to go quietly. If a special committee of Dell’s board doesn’t deem his offer superior, Icahn plans a proxy fight to install his own slate of directors.

Proxy Contest

Icahn and affiliates own about 4.5 percent of Dell’s shares, today’s filing shows. Financing for his proposal will come from existing cash at the PC maker and about $5.2 billion in new debt. That compares with about $16 billion of debt under the buyout proposal, according to the letter. Southeastern holds about an 8.2 percent stake, according to another filing.

Jefferies LLC has committed $1.6 billion to help finance the transaction, Icahn said in the Bloomberg TV interview.

“If I have to, I will put in $2 billion of my own,” Icahn said.

David Frink, a spokesman for Dell, said in an e-mailed statement that the special committee of the company’s board, which fielded buyout proposals, “is reviewing the Southeastern Asset materials and will have comments in the near term.”

Representatives of Silver Lake declined to comment.

Blackstone Group LP (BX), the world’s biggest buyout firm, pulled out of bidding for Dell (DELL)last month amid concerns over a worsening global PC slump.

As more consumers check e-mail, browse the Web and watch television and movies on smartphones and tablets, PC shipments plummeted 14 percent in the first quarter, the worst decline since researcher IDC began tracking data in 1994.

Blackstone Bails

The record drop in computer sales helped trigger the withdrawal, Blackstone said in a letter released at the time. Blackstone had made a non-binding offer to acquire Dell in March.

The PC market, although challenged, “is far from an obsolete technology, but one that is maturing and ultimately somewhat cyclical,” Icahn and Southeastern said in the May 9 letter. Furthermore, “the PC is not where the ultimate long-term opportunity lies for Dell, something we are confident Michael Dell is betting on, while leaving shareholders out in the cold.”

Michael Dell, who founded the PC provider in his Texas dorm room in 1984, needs to ensure majority control so he can pursue his plan to retool the struggling company as a maker of data-center gear and software for corporations -- without the scrutiny of public investors.

To contact the reporters on this story: Aaron Ricadela in San Francisco ataricadela@bloomberg.net; Cristina Alesci in New York at calesci2@bloomberg.net; David Carey in New York at dcarey13@bloomberg.net

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