Icahn Secures Loan to Recapitalize Dell, But Is It Enough?

In a presentation submitted Monday morning to the U.S. Securities and Exchange Commission, the special committee of Dell’s (NASDAQ:DELL) board of directors, charged with overseeing the company’s go-private transition, reiterated its concern that investor Carl Icahn of Icahn Enterprises (NASDAQ:IEP) had yet to line up financing to pay for his recapitalization proposal should shareholders approve the plan. This critique has been made at various junctures during discussions between the board and Icahn.

Although the Dell committee has worried that its second-largest investor would not be able to scrape up the necessary funds to finance the deal, Icahn said that financing would be lined up by the shareholder vote on the two proposals, scheduled for July 18.

On Monday, following Dell’s critical SEC submission, some details of Icahn’s financing plan emerged. His proposed offer will be financed with $7.5 billion of cash on the balance sheet, a $5.2 billion credit facility, and $2.9 billion from the sale of receivables, sources listening to a call to Icahn’s lender told Reuters.

During the 45-day go-shop period instituted by the committee to insure that the $24.4 billion offer made by founder and Chief Executive Officer Michael Dell was the best, only one hard counterbid was made, the proposal developed by Icahn and Southeastern Asset Management, one of Dell’s largest outside investors. They argued that the $13.65 per share bid made by Mr. Dell and private equity firm Silver Lake undervalued the company and that a portion of the company should remain in the hands of shareholders. In a May letter to the committee, a stronger version of the plan emerged: a $21-billion offer that would allow Dell shareholders to keep existing stock with the option of receiving either a distribution of $12 per share in cash or in stock valued at $1.65.

However, a June 18 letter from Icahn proposed that Dell tender 1.1 billion shares at $14 apiece. To secure the necessary financing needed for the plan, he has approached investors for loans. On Monday, investment bank Jefferies launched a covenant-lite $5.2 billion loan package to back his deal. During the conference call, Icahn arranged a $2.2 billion six-year loan and a $3 billion three-and-a-half year loan. Both tranches are offered at a discount of 99.5 cents on the dollar, and the six-year tranche will pay interest at 4 percentage points more than the London interbank offered rate, while the shorter-dated tranche is being offered at 3.5 percentage points more than Libor. Commitments on the $5.2 billion facility are due on Thursday, Reuters’s sources said.

Following Icahn’s tender offer, Dell’s leverage would be 1.7 times.

But in the regulatory filing, Dell said that Icahn’s proposal is “unrealistic” because it falls $2.9 billion short of the needed funds. Because of that estimated shortfall, the committee said that Icahn’s proposed $14 per share offered would be reduced to approximately $8.15 per share.

Even analysts are not convinced that Icahn’s plan is financially sound. Makor Capital analyst Albert Saporta wrote in a report seen by Bloomberg that his proposal was “unlikely to succeed,” noting the firm is keeping the probability of Mr. Dell’s leveraged buyout “going through on the original terms at 70 percent.”

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