My thinking on Carl Icahn changes day to day but my current model is that he is a man who after a long and successful career in money management retired in March of 2011 to spend more time on his hobbies. And that his hobbies are irritating Bill Ackman, hijacking public company M&A deals, and threatening his foes with "years of litigation."1 I've got nothing against Bill Ackman, but otherwise that sounds like my dream retirement too.
We talked about Icahn's Dell stake a little yesterday; I predicted that today Ackman would announce that Dell is a pyramid scheme, and I will award myself partial credit insofar as today a well-known short seller did come out calling Dell a bad and plummeting-cash-flow company, though not quite a pyramid scheme. But as for Icahn's plans I'm still a bit lost, though his letter to Dell's board has now been made public. This is the core proposal:
Rather than engage in the Going Private Transaction, we propose that Dell announce that in the event that the Going Private Transaction is voted down by shareholders, Dell will immediately declare and pay a special dividend of $9 per share comprised of proceeds from the following sources: (1) $4.26 per share, or $7.4 Billion, from available cash as proposed in the Going Private Transaction, (2) $1.73 per share, or $3 Billion, from factoring existing commercial and consumer receivables as proposed in the Going Private Transaction, and (3) $4.26, or $5.25 Billion in new debt.
We believe that such a transaction is superior to the Going Private Transaction because we value the proforma “stub” at $13.81 per share using a discounted cash flow valuation methodology based on a consensus of analyst forecasts. The “stub” value of $13.81 combined with our proposed $9.00 special dividend gives Dell shareholders a total value of $22.81 per share, representing a 67% premium to the $13.65 per share price proposed in the Going Private Transaction. We have spent a great deal of time and effort in determining the $22.81 per share value and would be pleased to meet with you to share our analysis and to understand why you disagree, if you do.
We hope that this Board will agree to adopt our proposal by publicly announcing that the Board is committed to implement our proposal if the Going Private Transaction is voted down by Dell shareholders.
Is the leveraged recap a good idea? Is Dell worth $22.81? Did Icahn really spend a good deal of time and effort in determining that number, and no time or effort checking his arithmetic? Was all this effort expended at the same time he was sampling all of Herbalife's wares? Beats me. But I like the phrasing of "adopt our proposal by publicly announcing that the Board is committed to implement our proposal if the Going Private Transaction is voted down by Dell shareholders." That's good lawyering! Well, enthusiastic lawyering anyway. Steven Davidoff doesn't buy it:
[E]ven if the Dell board thought Mr. Icahn’s proposal was fantastic, the current agreement requires the board to support the Dell acquisition. In fact, under the agreement the board cannot change its recommendation unless it deems Mr. Icahn’s proposal to be something that contains information the board did not know before the transaction and that a failure to act on it would be a breach of the board’s fiduciary duties.
But Icahn is not, technically, asking the board to change its recommendation. He's asking the board to put out a proxy saying: "You should totally vote for this LBO for $13.65 a share in cash. We recommend it wholeheartedly. And if you don't vote for it, we'll have no choice but to give you $9 a share in cash and a stub company that we think is worth $13.81. You can do that if you want, but we think you're making a terrible mistake."
That's kind of clever! The way I read the merger agreement I think there's an argument, though not a very good one, that it's allowed.2 In any case it's a close enough question that it can best be resolved with YEARS OF LITIGATION.3
If the board isn't quite willing to venture out on that series of limbs, Icahn's alternative proposal is to move up the annual meeting to coincide with the LBO vote and run his own slate of directors who will, if the LBO is voted down, go about implementing the recap. His $9 (or whatever) a share dividend requires the overseas cash repatriation and receivables factoring that are also supposed by the LBO, plus $5.25 billion of new debt financing, which, since he's a full-service irritant, will of course come from him:
To assure shareholders of the availability of sufficient funds for the prompt payment of the dividend, if our slate of directors is elected, Icahn Enterprises would provide a $2 billion bridge loan and I would personally provide a $3.25 billion bridge loan to Dell, each on commercially reasonable terms, if that bridge financing is necessary.
More common ground between Carl and me: my dream retirement also features the ability to mobilize vast sums of money in support of spur-of-the-moment amusements. In its most recent financial statements (TBF as of six months ago), Icahn Enterprises and its affiliated partnerships had about $4.3 billion in free cash.4 Since then they've spent around $1.4 billion on Dell stock (maybe) and $500 million on Herbalife, leaving about $2.4 billion of fun money. Almost all of which Icahn is committing to his Dell whim, along with $3.25 billion of his own money, though to be fair he'd be getting more than half of it right back in that dividend.
Will this recap happen? Will Icahn succeed in getting Dell's buyers to raise their price? I have no idea. Whatever happens had better happen quick: M&A activity is picking up, and by this time next week something else will probably have caught Icahn's attention.
Dell Schedule 14A with Icahn's letter [EDGAR]
For Icahn, a Game of Chicken With Dell’s Board [DealBook / Steven Davidoff]
Chanos: I'm Short Dell, Puzzled by Deal Talk [CNBC]
Icahn's Dell math gets an F [Fortune]
1.Years! Who says that? I feel like mostly people who say "see you in court" mean to imply "my cause is right and so I'll sue you and win." "I'll sue you and be annoying as fuck pretty much forever" is really Icahn-only, and amazing.
2.Section 5.3(f) is what prevents the board from changing its recommendation:
[N]either the Company Board nor any committee thereof (including the Special Committee) shall (i) (A) change, withhold, withdraw, qualify or modify, in a manner adverse to Parent ... the Recommendation with respect to the Merger, (B) fail to include the Recommendation in the Proxy Statement, (C) approve or recommend, or publicly propose to approve or recommend to the stockholders of the Company, an Acquisition Proposal or ... (ii) authorize, adopt or approve or propose to authorize, adopt or approve, an Acquisition Proposal, or cause or permit the Company or any of its Subsidiaries to enter into any Alternative Acquisition Agreement.
With the exceptions Davidoff discusses for subsequent events. Section 5.3(h) defines "Acquisition Proposal" as
any bona fide inquiry, proposal or offer made by any Person for, in a single transaction or a series of transactions, (i) a merger, reorganization, share exchange, consolidation, business combination, recapitalization, extra-ordinary dividend or share repurchase, dissolution, liquidation or similar transaction involving the Company, (ii) the direct or indirect acquisition by any Person or group of twenty percent (20%) or more of the assets of the Company and its Subsidiaries, on a consolidated basis or assets of the Company and its Subsidiaries representing twenty percent (20%) or more of the consolidated revenues or net income (including, in each case, securities of the Company’s Subsidiaries) or (iii) the direct or indirect acquisition by any Person or group of twenty percent (20%) or more of the voting power of the outstanding shares of Common Stock, including any tender offer or exchange offer that if consummated would result in any Person beneficially owning Shares with twenty percent (20%) or more of the voting power of the outstanding shares of Common Stock.
So clause (i) there - "recapitalization, extra-ordinary dividend" etc. - would seem to capture the leveraged recap, so the board can't recommend it or "publicly propose to approve or recommend" it to stockholders, or "authorize, adopt or approve or propose to authorize, adopt or approve" it. Is saying "we think this is a bad idea but if you vote no we'll do it" the same as recommending or approving it? Meh, probably, but you could at least argue about it.
3.Davidoff also says "Dell is even restrained in how it can publicly respond to Mr. Icahn. Except if required by law, Dell’s agreement prohibits it from making any public comment on Mr. Icahn’s proposal without the approval of the buyout parties." I'm not so sure; here is Section 5.9:
Neither the Company nor Parent, nor any of their respective Affiliates, shall issue or cause the publication of any press release or other announcement with respect to this Agreement, the Merger or the other transactions contemplated hereby without the prior consent of the other party, unless such party determines in good faith, after consultation with legal counsel, that it is required by applicable Law or by any listing agreement with or the listing rules of a national securities exchange or trading market to issue or cause the publication of any press release or other announcement with respect to this Agreement, the Merger or other the [sic!!] transactions contemplated hereby, in which event such party shall use its reasonable best efforts to provide a meaningful opportunity to the other party to review and comment upon such press release or other announcement prior to making any such press release or other announcement; provided that (i) the Company shall not be required to provide any such review or comment to Parent in connection with the receipt and existence of an Acquisition Proposal and matters related thereto or a Change of Recommendation ....
Does talking about Icahn's recap idea constitute an announcement "with respect to this Agreement, the Merger or the other transactions contemplated hereby"? Who knows, years of litigation, etc.
4.The math is $3,140mm "Cash and cash equivalents" plus $1,886 "Cash held at consolidated affiliated partnerships and restricted cash" (both page 1 of the 10-Q) minus $700mm of "restricted cash" (page 7).