Will Blackstone and Icahn Shake Up Dell’s Journey to Privatization?

Man Measuring MoneyThe prickly question of how high Dell (NASDAQ:DELL) should be valued — given the slumping personal computer market — has followed the company’s buyout journey since the very beginning. The proposal submitted by founder Michael Dell and private equity firm Silver Lake, which offered $13.65 per share to take the company private, prompted outrage in several shareholders over the proposed price, but it was tempered by a condition set by the special committee of the company’s board. After the $24.4 billion offer was announced on February 5, the committee mandated that any offer submitted during the 45-day go-shop period must be explored “in good faith.”

Several bids flew in under the March 22 deadline set by board, putting the future of the company into question. As Reuters reported, Dell received alternative proposals from Blackstone Group (NYSE:BX) and Carl Icahn that could be superior to the $24.4 billion takeover offer. “The new bids could turn the sale of Dell into a three-horse race that could drag out for months,” noted the publication. “It also could threaten the future of Michael Dell, who founded the technology giant at the age of 19 with just $1,000.”

Mr. Dell has said he is willing to explore the possibility of collaborating with third parties to work out alternative proposals, but the company said the board’s special committee is still continuing to support the pending sale to Michael Dell and Silver Lake. Still, the committee is determining whether either offer could trump the existing deal, reported Reuters.

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Icahn Enterprises (NASDAQ:IEP) offered to pay $15 per share for a 58 percent stake in Dell, while Blackstone proposed an offer of $14.25 per share. Sources told the publication that Icahn has put forward the possibility of working with Blackstone as well, and that the two groups have had preliminary talks. “We plan to review the Blackstone proposal in greater detail,” Icahn Enterprises said Monday, adding that the Michael Dell-Silver Lake proposal “significantly undervalues Dell…

The three proposed offers have created a varied landscape of possible paths for Dell’s board to consider. One problem that the special committee must figure out is how to compare the proposals. Both Blackstone’s and Icahn’s offers will keep a portion of Dell’s stock publicly traded, while Mr. Dell’s offer will take the computer manufacturer private.

Major shareholders — including Southeastern Asset Management and T. Rowe Price (NASDAQ:TROW) — have also said that Mr. Dell’s offer undervalued the company and have pledged to vote against the deal, which requires a majority of shareholders, except the founder, to pass. But Silver Lake has no plans to increase its offer until Dell’s special committee rules on the rival proposals. If their offer is found to be superior, Silver Lake and Michael Dell will get one opportunity to revisit their original bid.

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“With three forces at work, we believe a higher buyout bid is in the cards and we continue to believe that an $18.00 buyout price for Dell makes sense; however, it is unlikely that this price level will occur in the first round of bidding,” wrote Topeka Capital Markets analyst Brian White in a note circulated Monday. The firm’s price target was based on a calculation of 7.7 times its 2014 pro forma earnings per share estimate plus net cash per share. Another way to calculate that figure is to use a straight price to earnings ratio of 10x. “This $18.00 price tag approaches the mid-point (i.e., $18.83) of the $13.65 buyout price and Southeastern’s $24.00 valuation assessment,” added White.

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