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Carl Icahn Does Another Dell Thing

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Carl Icahn seems to have a lot of fun. Today he wrote a crazy letter to Dell shareholders that opens this way:

We take this opportunity to respond to rumors regarding the availability of financing for our proposal for a recapitalization at Dell and to address recent statements by Dell that demean the prospects of Dell. We are amazed by these statements by the Dell Board. In what other context would the person tasked with selling a product actually spend their efforts negatively positioning the very product they are trying to sell? Is that how the supposed “go-shop” was conducted? Can you imagine a real estate broker running advertisements warning of termite danger in a house each time a prospective buyer seems interested?

We can talk about the "recent statements by Dell that demean the prospects of Dell" in the footnotes1; up here let's talk about Icahn's "respon[se] to rumors regarding the availability of financing for our proposal for a recapitalization at Dell." He says later in the letter:

We are proceeding to obtain commitments for $5.2 billion of senior debt financing to be made available to Dell as a bridge loan to guaranty the tender offer and believe that we are on target to achieve that result. A major investment bank has indicated its willingness to make available $1.6 billion and Carl Icahn and his affiliates would make available $2 billion if necessary to facilitate this commitment.

So the response to "rumors" that (1) he doesn't have $5.2 billion of financing and (2) he'd need more than $5.2 billion anyway is: "we have $3.6 billion. Probably." Way to quash those rumors. But actually it gets better; attached to this letter is another letter, to plaintiffs' lawyers suing Dell over its buyout, which includes this passage:

We believe that the combination of the restrictive definition of Superior Proposal, together with the other express terms of the Merger Agreement, including large termination fees and matching rights in favor of Michael Dell/ Silver Lake, act as almost impossible barriers to any potential bidder unseating the Going Private Transaction. In particular, how does a potential buyer secure financing for this size deal, in light of the matching right, and the fact that the banks would not be paid anything in the event the bid is matched or topped.

So, to be clear, Carl Icahn's response to rumors that he may not have financing for his recapitalization proposal is (1) of course we have financing, (2) but you can't see it, and (3) actually come to think of it it's impossible for us to get financing. He has the best job in the world.

What else? Apparently Icahn is sick of his previous proposal for a leveraged recap in which every Dell shareholder would get $12 and some stub equity, so he's made a new proposal, in which every Dell shareholder will get $10 and some stub equity. Or something like that. The new proposal is:

We propose that Dell commence a tender offer for approximately 1.1 billion Dell shares at $14 per share (for a maximum of $16 billion available in the tender offer). Icahn and Southeastern (who together hold approximately 13% of Dell's shares) will agree not to tender in the tender offer. Our proposal allows those who believe, like us, that the $13.65 price being offered in the Michael Dell/Silver Lake going private transaction significantly undervalues Dell, to continue to hold Dell shares. It also provides an opportunity for those who wish to tender at $14 a share to do so, with the knowledge that they will be able to sell at least approximately 72% of their position, and possibly more if other shareholders do not fully subscribe to the tender offer.

72% of $14 is $10.21. So if everyone tenders you get $10.21 and a stub stake in Dell, as opposed to the $12 + stub stake you'd get in the old proposal. To be fair your new stub stake is at a $14 rather than $13.65 valuation so there's that. Also it was never clear that the old proposal meant to actually provide enough cash for everyone to elect cash. Anyway you can compare them at your leisure here:

Thaaaaaaaaat's pretty close, no?2

What else, else? Oh, right, Icahn bought half of Southeastern's shares:

We are also announcing today that we have purchased approximately 72 million shares of Dell from Southeastern Asset Management, with proxies to vote at the July 18 Special Meeting. Southeastern continues to be part of our group in opposing the Michael Dell/Silver Lake deal and will share the fees and expenses of the proxy fight on a pro rata basis.

Good questions here include "why?" and "at what price?" The "what price" is a good one: it would be sort of nuts for Southeastern to sell below the $13.65 deal price, even though the market price is in the $13.40s, and you could see why it'd look good for them to sell closer to the $14 price they're calling for. On the other hand it would be nuts for Icahn to pay more than $13.65 because, y'know, he's not going to win.3 On the other other hand: everything here is nuts! [Update: $13.52, according to the just-filed 13D. So ... sort of nuts?3A]

The "why" is also a fair question. Dan Primack speculates that "Apparently the theory is that an outspoken activist would be more effective with the shares than would a longer-term investor like SAM, although it's not entirely clear why." A more straightforward answer is that Southeastern likes the idea of voting down the merger, doing a $14-a-share recap, etc. etc., but is a sensible economic actor and wants to hedge its exposure there by cashing out some of its shares at a good price.4 And Carl Icahn is the natural buyer on whom to offload those shares. Because he just might be something other than a sensible economic actor.

Icahn Buys Half of Southeastern’s Stake in Dell and Calls for a Stock Buyback [DealBook]
Carl Icahn rearranges the Dell chairs [Fortune]
Open Letter to Dell Shareholders [Carl Icahn, via Bloomberg]
Schedule 13D/A [EDGAR]

1.I dunno, what do you think? Like, some of this is feigned outrage: of course Dell needs to make the case to shareholders that selling for $13.65 is better than holding on for unlimited upside and so forth, so of course the proxy skews bearish. On the other hand, it's a fair point that writing a bearish proxy at the same time you're supposedly running a go-shop process does leave you open to charges that you could have perhaps mustered more enthusiasm for the go-shop. Termites etc.

2.Oooh there are wee structural differences in how you get to your prorated $10ish a share + a stub stake but I don't want to hear it. This is a liquid publicly traded stock; you can construct either of Icahn's offers from the other with minimal effort and essentially no economic difference. Also I'm assuming the new offer is $15.6 billion in cash, which you can get by adding up his financing sources; the first mention of the proposal rounds to $16 billion.

3.Also: it'd be nuts for him to pay more than $13.40ish, because he can do that in the market! And buying in the market, unlike buying from Southeastern, adds shares to the anti-buyout group; buying from Southeastern just reshuffles them.

3A.Actually it makes a kind of sense. Split the difference roughly 50/50 between the market price and the deal price. Icahn gets a discount for taking on more of the risk of his proposal ultimately delivering more value; Southeastern gets out at a premium to market and hedges its ultimate exposure to the risk of Icahn's proposal actually happening and being a disaster. It's a 1% discount to the deal price which is pretty much, like, just financing. It does look kinda bad. Dan Primack has more.

4.This makes more sense if it's selling above $13.65, but even at $13.65 (or lower!) there's an argument that you don't need that much exposure to an Icahn-controlled, post-levered-recap Dell.