Icahn alliance threatens Dell deal

GREG ROUMELIOTIS AND SOYOUNG KIM
Last updated 16:15 26/03/2013

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Two of the most prominent US investors could upset Michael Dell's US$24.4 billion ($29 billion) buyout bid for Dell, after billionaire Carl Icahn opened the door to an alliance with Blackstone Group to wrest control of the computer maker from its founder.

Icahn said on Monday he has started preliminary talks with Blackstone. Both sides have made bids that could be superior to the offer on the table from Michael Dell and private equity firm Silver Lake Partners.

The backroom negotiations show how what started as a plan by Michael Dell and Silver Lake to take the PC maker private could turn into a months-long process.

Icahn has proposed paying US$15 per share for 58 per cent of Dell. Blackstone has indicated it can pay more than US$14.25 per share for the whole of the company, all in cash or partly in shares, leaving Dell as a publicly listed company. The Silver Lake-backed group offered US$13.65 per share in cash to take Dell private.

Dell, Silver Lake and Blackstone declined comment.

Icahn, who owns a US$1b stake in Dell, said both his and Blackstone's offers give the company's largest investors what they wanted most: the ability to retain publicly traded shares of Dell.

Southeastern Asset Management, Dell's largest independent shareholder and one of the most vocal opponents of the Silver Lake plan, said it was pleased about that prospect, as well as the higher offers.

Another investor, Bill Nygren, co-manager of the Oakmark Fund, added: "Given the wide range of estimated values for Dell shares, if all else is nearly equal, we believe a proposal is superior if it allows investors who want to remain invested in Dell the opportunity to do so."

OPTION TO KEEP STAKES

The value of Blackstone's and Icahn's offers depends on how much Dell shares would be worth following a buyout. However, Blackstone's offer trumps Silver Lake's outright because all shareholders can cash out, if they wish to, at a higher price.

What is more, Blackstone's offer to Dell shareholders of the option to maintain stakes in the company and profit from any upside is likely to be viewed positively by the special committee set up to assess the offers, according to two people familiar with the matter.

The outcome of the auction would determine the future of Dell, which was regarded as a model of innovation as recently as the early 2000s but has struggled to make up for declining market share in the global PC market.

A source familiar with the matter said last week that Dell had slashed its internal forecast for fiscal 2013 operating profit to about US$3b, down sharply from the US$3.7b it had predicted previously.

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Dell's shares closed up 2.6 per cent at US$14.51 on Monday, indicating investors expect a deal to be done at a price higher than the Silver Lake bid. Earlier in the session they touched US$14.64, the stock's highest level in 10 months.

"We continue to believe a higher bid than the current US$13.65 per share offer will likely be offered but, based on our assumptions, a US$15 per share bid may be a threshold," Wells Fargo Securities analyst Maynard Um said in a note.

"We believe a higher Silver Lake/Dell bid might still be a more attractive and strategic option, assuming information regarding the public stub and financial services sale is accurate," he said.

Late on Sunday, two sources close to the matter said that the Silver Lake group had no plans yet to increase or amend its offer until Dell's special committee comes out with a ruling on the rival proposals.

DOES MICHAEL DELL STAY?

As part of his deal with the special committee of Dell's board that is running the auction process, Michael Dell has to explore the possibility of working with third parties on alternative offers. On Monday, Dell said he had reaffirmed that commitment.

Still, Michael Dell is very concerned that Blackstone's offer would dismantle the PC maker he founded in 1984, two people close to Michael Dell said. The founder is worried that the buyout firm's plans would be inconsistent with his strategy to reinvest in the company, the sources said.

Michael Dell is planning to meet with Blackstone to discuss the private equity firm's bid, two other sources familiar with the situation said.

Blackstone made no mention of asset sales in its preliminary offer. But people familiar with the matter have told Reuters that Blackstone has considered a potential sale of Dell's financial services business as part of its turnaround plan.

Michael Dell's role also remains unclear in a Blackstone-led deal. The buyout firm has already made an unsuccessful push to recruit Oracle president Mark Hurd to run Dell if it takes over the company, one source familiar with the situation said last week.

A number of issues remain to be addressed, a separate person familiar with the matter said on Monday of Michael Dell. Among them, what Michael Dell would do if a buyer wanted to sell a business and he did not, the source said.

Potential buyers are likely to want to sit down with Michael Dell to discuss his plans for a privately held Dell in more detail, the source said, adding that Blackstone had not done so yet.

Switching bidding allegiances could preserve an affiliation with the company for Michael Dell, who founded the technology giant at the age of 19 with just US$1000.

Under the Silver Lake deal, he planned to contribute his roughly 16 percent share of Dell's equity, along with cash from his investment firm MSD Capital, and remain CEO of the company. Silver Lake is putting up US$1.4b.

- Reuters

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