Blackstone’s preliminary proposal for Dell makes a messy situation even messier

March 23, 2013
March 23, 2013

(UPDATE 3/23 3:30 p.m. ET: The special committee of Dell’s board is expected to announce before the market closes tomorrow whether it needs more time to assess the preliminary offers by Blackstone and Icahn, or whether those proposals are reasonably likely to lead to a superior offer.)

The future of Dell has become even more uncertain as Blackstone submitted a preliminary proposal to a special committee of the PC maker’s board, in the latest twist to one of the more unusual deal sagas in recent years. Dell’s special committee now has to decide whether it will enter into talks with Blackstone, while the buyers in Dell’s original deal have one chance to top any competing offer. But any suitor for Dell still faces hurdles.

In February, Dell announced a $24.4 billion go-private deal with founder and CEO Michael Dell, private equity firm Silver Lake, and Microsoft. Because it was a sale involving management, Dell’s board had to work to ensure that it didn’t appear that Dell, the man, was getting a sweetheart deal. Also, the shareholder vote to approve any deal will need to sway a majority of Dell’s outside shareholders.

But management-led buyouts usually stir shareholder opposition, which came quickly in the form of Southeastern Asset Management, Dell’s largest outside shareholder. It said the $13.65 per share offer price was too low. Then came T Rowe Price and, inevitably, it seemed, Carl Icahn, who is also said to have expressed interest in a Dell deal.

But the big banks are known to not lend to Icahn because their corporate clients would frown upon such a move, making it hard for the activist investor to get financing for such a large deal like Dell. Icahn faced similar problems in 2011 when he pushed Clorox to sell itself and then offered to buy the company for about $10 billion, eventually dropping the bid. For Dell, Icahn is more likely using his offer as pressure for the company to issue a special dividend instead of selling itself.

After the Dell deal was announced, the special committee of Dell’s board held a “go shop” in which it canvassed for better offers for 45 days, which ended last night. The committee also lowered the breakup fee provision in the deal that a buyer offering a superior proposal would have to pay to $180 million.

But there are still hurdles for any buyer of Dell. First, it’s unclear how Icahn and other shareholders will react to Blackstone’s offer or any topping offer that may come from the Michael Dell group, and both may still face shareholder opposition. More importantly, Dell’s business and earnings outlook has deteriorated even from a month ago when the original deal is announced, according to sources, meaning any buyer may have to throw in more equity or put on even more debt.

As part of its assessment of whether to bid for Dell, Blackstone suggested including a contingent value right (CVR), in which Blackstone would pay a lower price now but put in additional money if Dell hit certain performance benchmarks, but Dell’s special committee rejected that idea, according to sources. There is also a “public stub” option, which would leave a stock component to Dell’s ownership structure, allowing for other shareholders like Southeastern Asset Management to participate in a deal, sources said.

Blackstone also approached former HP CEO Mark Hurd, who is now at Oracle, about heading up Dell. But Hurd would have to contend with Michael Dell, Dell’s largest shareholder, and by making that move, Blackstone has not curried any favor with Dell, the man. Theoretically, Michael Dell has agreed to work with any competing buyer, but he is not required to roll over his shares into another offer.

All of this has made Dell a very messy situation, and given Dell’s declining prospects, the company desperately needs to figure out its future. Buyers also don’t like messiness, especially a private equity firm like Silver Lake that is not used to shareholder opposition to its deals, much less a competing bid in a go shop, which is rare. When Blackstone squared off with Icahn for its Dynegy deal in 2010, Blackstone eventually dropped out. No other buyers, including Icahn, could clear a deal, and Dynegy eventually went bankrupt.

It’s unlikely Dell will face a similar fate, at least not any time soon, but it’s a company that needs a turn-around. But that can’t start until its ownership situation is figured out. And it looks like that could take some time.

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