Let's take Carl Icahn's bid for Dell seriously because, y'know, no one else will. At first I was a little underwhelmed by Icahn's bid of $12 in cash or stock for Dell, which careful noticers will notice is less than the $13.65 offer on the table from Silver Lake and Michael Dell, but that $12 is in addition to hanging on to your pre-existing stock, so it's not that bad a deal. It's a slightly juiced version of Southeastern's $11.86/share special dividend idea, though a rather de-juiced version of Icahn's original $15-a-share part-cash-part-stock merger. In this one, for instance, Icahn isn't stumping up any more cash than the $1.1 billion he already has, whereas in the old one he was proposing adding another $1 billion.
If you own a Dell share, under Icahn's plan you keep your share and get to pick whether you also want (1) $12 in cash or (2) $12 "in additional shares valued at $1.65 per share," which is just a long way of saying 7.27 more shares. Here's how that might look if roughly 1/3 of the non-Icahn/Southeastern holders pick new shares:
Why did I pick one-third, when the proposal itself "[a]ssumes 20% of fully diluted shares outstanding do not elect cash"? Well mostly because I'm puzzled about where the money for the cash comes from. Here is what the proposal says, and ask yourself as you read it: who picked the all caps, Icahn or Southeastern?
FINANCING FOR OUR PROPOSAL WILL BE OBTAINED FROM EXISTING CASH AT DELL AND APPROXIMATELY $5.2 BILLION IN NEW DEBT. IT SHOULD BE NOTED THAT THE MICHAEL DELL GOING PRIVATE TRANSACTION PROVIDES FOR AN AGGREGATE OF APPROXIMATELY $16 BILLION OF DEBT. HOWEVER, IN ANY CASE WE INTEND TO OBTAIN A BRIDGE LOAN TO GUARANTEE THE AVAILABILITY OF THE $5.2 BILLION OF NEW DEBT FOR OUR PROPOSAL.
The Silver Lake proposal assumes there will be $7.4 billion in cash at Dell at closing; if you use that number and the $5.2 billion of new debt then you get something like this:
Which works out nicely but requires that no more than 65% of shareholders elect to take $12 in cash (and, again, keep some equity). If only 20% of the non-Icahn/Southeastern holders elect shares, I see them about $2.8bn short.1
What would you pick? Well they sketch out some EPS math; here's my attempt to replicate it:2
Dell is up 12 cents today to $13.44, so, sure?
Actually I assume that stock price reaction is caused by the fact that this proposal makes it more likely that the Silver Lake deal will close, soon, and for $13.65. Like ... this is all they could come up with? It's pretty uninspiring value-creation-via-paper-shuffling, with no new cash from Icahn or Southeastern and a sticker price well below the $20+ type numbers Icahn and Southeastern had been throwing around.
You might also contrast Icahn's initial proposal, in which Jefferies is mentioned as an advisor though not necessarily as a financing source, with the final joint Southeastern/Icahn proposal, in which no financial advisor or financing source is mentioned. Just a bridge loan from ... somewhere. Six weeks ago Dell concluded that Icahn's interest in the company "could reasonably be expected to result in superior proposals, as defined under the terms of the existing merger agreement," and so elected to continue working with him to firm up the proposal. But over those six weeks the proposal seems to have become considerably less firm. Icahn's had six weeks of due diligence and he's lowered his price and lost his potential financing source. That's not much reason to be optimistic.
Dell's directors can get out of the Silver Lake deal and accept a "Superior Proposal," meaning a proposal to buy at least 50% of the company that "the Company Board has determined in its good faith judgment (after consultation with outside legal counsel and its financial advisor) is more favorable to the Company’s stockholders than the [Silver Lake deal], taking into account all of the terms and conditions of such Acquisition Proposal (including the financing, likelihood and timing of consummation thereof)."
It's hard to imagine that this un-financed non-acquisition-proposal is that. Instead it's full of shouty legal threats like:
IF THE GOING PRIVATE TRANSACTION TURNS OUT TO BE A HOME RUN FOR MICHAEL DELL IN THE COMING YEARS, WHICH WE EXPECT WILL IN FACT OCCUR, IT MAY WELL BE ATTRIBUTED TO AN ERROR BY THE DELL BOARD. THIS IS THE LITIGATION RISK THAT YOU NOW FACE. EITHER GIVE SHAREHOLDERS THE REAL CHOICE THEY ARE ENTITLED TO OR FACE THE LEGAL LIABILITY FOR YOUR FAILURES.
Umm that's not wrong? I don't especially envy the Dell board; the initial Silver Lake deal was something of a capitulation, everyone will be mad at them no matter what they do, and none of their current options seem all that great. But this deal doesn't even seem like an option, does it?
2.Based on $1.78 2014E EPS estimates from this deck, getting $3.17bn of earnings on 1.78mm shares outstanding. Assumes 4% interest on the new debt, for no especial reason. The 5x multiple is based on a mid-5s Dell forward multiple pre-deal-talks, slightly discounted for the extra leverage and, y'know, reduced likelihood of LBO.
Incidentally if you want the spreadsheet, which is super ugly and kludgy and about which I make no representations, here it is.