Does Icahn’s Offer for Dell Lack Credibility?

dellThe special committee of Dell’s (NASDAQ:DELL) board of directors, charged with overseeing the company’s go-private transition, critiqued the recapitalization proposals made by Carl Icahn of Icahn Enterprises (NASDAQ:IEP) and partner Southeastern Asset Management as “lacking credibility.”

In a presentation submitted Monday morning to the U.S. Securities and Exchange Commission, the committee stated that Icahn’s recapitalization proposal was “inconsistent,” given the range of share prices he has specified for the deal and reiterated its concern that he has yet to line up financing to pay for his proposal should shareholders approve the plan.

The July 18 vote to determine whether shareholders should accept the offer made by company founder and Chief Executive Officer Michael Dell to take Dell private for $24.4 billion is drawing nearer. According to the presentation materials, prepared for Monday’s meetings with the proxy advisory firm Institutional Shareholder Services, the committee once again backed Mr. Dell’s privatization bid.

After Mr. Dell submitted his offer to the board, as a matter of propriety, Dell’s board instituted a 45-day go-shop period to insure the best possible offer was sourced, and several offers trickled in before that window closed in late March, But only the proposal submitted by Icahn and Southeastern Asset Management, one of Dell’s largest outside investors, has stuck. Their official $21-billion offer, made at the beginning of last month, challenged the $13.65-per-share bid made by Mr. Dell and the private-equity firm Silver Lake by allowing Dell shareholders to keep existing stock with the option of receiving either a distribution of $12 a share in cash or in stock valued at $1.65.

However, a June 18th letter asked shareholders to accept a tender offer for 1.1 billion shares at $14 apiece. This is the inconsistency to which the committee referred.

Screen Shot 2013-06-24 at 10.03.09 AM

Icahn, now the second largest shareholder after Mr. Dell, and Southeastern have argue that Mr. Dell’s offer values his company far too low. But the committee has said that the Dell-Silver Lake plan is best, defending it as “an all-cash offer at a significant [and] certain premium,” that represented the “highest price available” based on exhaustive evaluation of alternatives. Given the increasingly negative trends in the Dell’s core PC markets and the correspondingly poor financial outlook for the company, the committee wrote that the premium of 37 percent over a 90-calendar-day trading was significant. In fact, the $13.65-per-share offer is equal to 5.4 times estimated fiscal 2014 earnings. But, most importantly for the committee, the Dell-Silver Lake plan avoids the high risk of a leveraged recapitalization.

The Mr. Dell-led privatization is not without problems. A key concern facing the transformation from “Core Dell” — a business dependent on personal computers — to “New Dell” — a business dependent on enterprise solutions — is the fact that the company’s transition is being outpaced by the rapid market shift to cloud computing. Plus, the picture is already grim, with revenue expected to decline 8 percent this year and operating income to drop 28 percent.

Screen Shot 2013-06-24 at 10.04.17 AM

But, according to the committee, the Icahn deal, which would leave Dell largely a “PC company,” would bring even more financial concerns. In particular, it would “dramatically elevate [the] risk profile and uncertainty for existing Dell shareholders.” The committee noted that details of the proposal outlined in a June 18th letter would leave the deal with about a $2.9 billion funding shortfall. If the shareholders receive as much cash as Icahn has promised, the terms do not provide for enough liquidity for the company to operate after the transaction.

Still, peaking to Reuters, Icahn expressed confidence. “Despite the company using scare tactics concerning the company’s health, you cannot get away from the fact that their own consulting firm, BCG, believes the company would earn $3.3 billion for 2014,” he argued. He added that he expects to have financing lined up by the shareholder vote.

Shares of Dell closed Friday at $13.35.

Follow Meghan on Twitter @MFoley_WSCS

Don’t Miss: As Dell Again Rejects Icahn Bid, This Third Option Looms.