There's been a lot of fun stuff in the news about Dell recently, in the run-up to tomorrow's end of the go-shop period on its LBO by Silver Lake and CEO Michael Dell. The Journal today kind of explained why:
People working on potential challenges to the Dell offer say the revelation of information on the background of the deal before the proxy is filed could dissuade counter bids or make it tougher for another party to shore up financing.
Get it? Someone connected with Dell is anonymously flogging its terribleness to any reporter who'll listen, in order to keep anyone from putting in a higher bid in the next 36 hours. Don't buy Dell, they whisper. Leave this mess to us. You don't want to get anywhere near it. Some truly terrible shit is going to come out in the proxy. Like apparently Dell forgot how to make money:
The filing is expected to focus in part on a review of corporate financial forecasts presented to the board starting last summer, the people familiar with the matter said. Dell managers said they expected $5.6 billion in adjusted, or non-GAAP, operating profit for the fiscal year that ends in early 2014, the people said.
But around that time, Dell began badly missing the targets set forth by managers, who were counting on the rollout of Microsoft Corp.'s new Windows 8 operating system and an increase in PC sales to drive Dell's profits higher in 2014. ... Now, rather than the $5.6 billion figure, Dell expects an operating profit closer to $3 billion, its lowest in years ....
To be fair, announcing "we were off by ~40-50% on our earnings estimates but we've got them perfect now" is not wholly convincing, and sell-side analysts at least seem to expect rather more than that. Per Bloomberg I see estimated GAAP (i.e. lower than non-GAAP) operating income of $3.57bn, and expected EBITDA (which historically tracks Dell's non-GAAP operating income closely) of $4.36bn. I did some extrapolating and here's the next two years of EBITDA per analyst consensus and per Dell:
One oddity is that the people who should really believe management's estimates are, y'know, management, and the buyout group, and their financing sources. Dell seemed to have been targeting a pro forma leverage multiple of under 4x with a $19 billion debt load. That seems ... I mean, what do I know, I'm not a person familiar with the matter, but that seems based on the pre-come-to-Jesus EBITDA estimates. Depending on what "closer to $3 billion" means, the new figures seem to imply more like 5-6x leverage to me.
Which I guess would make you less interested in financing a competing bidder than you were before all this this came out? Of course it would also make you less interested in financing the current bidder; Silver Lake and its banks still need to raise quite a lot of debt and all this talk of how hopeless Dell is can't really help with that. Though current Dell creditors don't seem all that fazed by the steady leak of bad news: the 2040 bonds and the 5-year CDS are both tighter now than they were two weeks ago.1
There are some other impediments to a competing bid, which everyone thinks will come, if at all, from Blackstone. One is the fact that Silver Lake has Dell's CEO already signed up, so a new bidder might need a new CEO, though technically Michael Dell has agreed to "explore in good faith the possibility of working with" a competing bidder. Dan Primack reported yesterday that Blackstone has been talking to former Hewlett-Packard CEO Mark Hurd. Hurd has the advantage that he used to run a company that I at least have trouble distinguishing from Dell, so I guess he'd fit right in; he has the disadvantage that he doesn't have $3.7 billion worth of Dell stock to roll over, so if Michael Dell will only work with Silver Lake, Blackstone's cash price tag will be rather higher.
On the other hand, Blackstone also seems to be talking to Southeastern Asset Management about Southeastern rolling its $2bn-ish worth of Dell stock into a Blackstone deal, which would make up part of the difference. Get Carl Icahn - who thinks the company is worth $22 and change - to roll his nebulous stake and you've got about as much equity on Blackstone's side as there is on Silver Lake's, even if Michael Dell did want to cash out in a Blackstone deal.2
So the dissident shareholders might be willing to help out with a Blackstone bid, and Ronald Barusch has a clever idea for them to get Blackstone involved: they should offer to pay a breakup fee out of their own pockets:
Those shareholders would very likely want to see a bidding war start between Blackstone and Silver Lake. And that is where it could get interesting.
With the approval of the Dell special committee, Blackstone could go to those shareholders and say: “If we make a topping bid and Silver Lake ultimately outbids us and buys Dell, we need you to agree to share X% of your profits over $13.65 per share with us because you would not have received those profits if we hadn’t bid. And we are not willing to make a firm bid and pay for financing unless we know that there will be something in it for us even if we lose.”
As a fan of Coasean bargaining, I love this idea. But it's a little tough for Southeastern and Icahn, isn't it? Southeastern, as fiduciaries for their investors, might have a tough time explaining why they made less money on the Dell buyout than other, passive shareholders who free-rode on their profit-sharing agreement with Blackstone. And Icahn, who bought most of his shares well above the $13.65 deal price with the purpose of catalyzing a better deal, might feel a bit miffed to pay Blackstone a portion of profits above $13.65 just for them doing the same thing. "Hey, I'm the annoying interloper here, not you," he might reasonably think.
So we'll see. Possibly by tomorrow, though possibly not. The go-shop period ends tomorrow, but that's sort of a fake milestone, as the Journalpoints out:
Blackstone doesn't necessarily have to give Dell an offer by Friday night's deadline. Rather, it and any other suitors have until midnight on Friday to let Dell know if they are interested in pursuing a formal bid for the company, according to people familiar with the process.
This so-called "indication of interest" could include a price, or price range, the suitor is willing to pay, but it doesn't have to, these people said. Rather, a suitor must convince Dell that it is serious about pursuing a bid that could trump the current buyout offer, they said. From there, negotiations could carry on for as long as two months, one of the people said.
Well that's not a very high bar to frighten Silver Lake and keep things interesting, is it? A lot can happen in two months. Maybe Dell will realize that that $2.6 billion in 2014 operating income was just temporarily misplaced, not permanently lost. Maybe someone will figure out how to make Icahn's dividend recap plan work. Blackstone putting in a nebulous pseudo-bid, and the board accepting it as the basis for continued negotiations,3 would give Dell's dissident shareholders a lot of optionality. Maybe they should pay Blackstone just to do that.
Dell Walks Fine Line in Pitch for Buyout [WSJ]
Dealpolitik: How Could Blackstone Be Incentivized to Make a Competing Bid for Dell? [Deal Journal / Ronald Barusch]
Blackstone Exploring Various Scenarios for Dell Counterbid [WSJ]
Blackstone weighs Dell bid, considers new CEO [Fortune / Dan Primack]
1.Though both seem to show a bit of an uptick very recently. Bonds:
2.Would he? Presumably, like Southeastern and Icahn, he thinks Dell is worth more than $13.65 a share; else why would he be buying it. Of course, rivalries being what they are, you couldn't blame him for thinking it's worth considerably less than that in Mark Hurd's hands.
3.I gotta think that bar is low? Like, if Blackstone comes in tomorrow and says "we want to bid, we're pretty sure we'll pay at least $14, not held of course, but work with us on financing and shareholder lockups and whatnot" - what, is the board gonna say no? So much suing. So much Carl Icahn.