The latest in the Dell saga is that Carl Icahn has announced that he's got the money to do his $10-to-$14-or-whatever-a-share tender offer, and by "money" of course I mean commitments from lenders that are contingent on the tender offer happening, which itself is contingent on a bunch of other things, including Dell shareholders voting down the Michael Dell / Silver Lake buyout, another deal not materializing, Carl Icahn winning a proxy fight and electing directors who think that the tender offer is a good idea, and those directors approving the tender offer.1 When I first saw this, I figured the committee meetings for Icahn's banks must have been kind of fun? Like: you're probably not going to get hit on this? But if you do, my lord, what have you gotten yourself into?
But then I saw the commitments and realized the meetings were pretty easy; they mostly went like:
Carl Icahn: Any new business?
Carl Icahn: We've been asked to commit $3.1 billion to Carl Icahn's pseudo-bid for Dell.
Carl Icahn: Okay. Do you recommend we do that?
Carl Icahn: I do.
Carl Icahn: Okay, we'll do it. Congratulations.
Carl Icahn: Thanks boss.
I mean! A while back Icahn said that Jefferies was in for $1.6 billion, and Icahn himself for up to $2bn, of their $5.2 billion total need. Then Jefferies went and tried to raise the remaining $1.6bn. Here's how they did:2
They got $500mm in non-Carl Icahn money ($179mm in direct commitments and $321mm in back-to-back commitments through Icahn). For the rest they asked Icahn to reach deeper into his wallet. Ten percent of these loan commitments come from people who aren't Icahn or Jefferies.
Reuters says that "The pricing, original issue discount and fee structure, as well as low leverage of 1.7 times, made the loan package attractive to investors, said sources evaluating the transaction," though not attractive enough to make them invest I guess? Here's Icahn's package, again from Reuters (also in Exhibit A here):
The $5.2 billion financing includes a $2.2 billion, six-year term loan B-1 and a $3 billion, 3.5-year term loan B-2, sources told Thomson Reuters LPC.
Pricing on the TLB-1 is set at LIB+400 with a 1 percent Libor floor, while pricing on the TLB-2 is set at LIB+350 with a 75 basis-point Libor floor. Both tranches are offered at a discount of 99.5 cents on the dollar and will carry 101 soft call protection for one year.
Silver Lake's financing package, meanwhile, includes:
- a $4.0bn, 6.5-year, senior secured Term B at Libor + 350 with a 1% floor, and
- a $1.5bn, 5-year, senior secured Term C at Libor + 300 with a 1% floor.
Plus tons of other debt (an ABL facility, $3.25bn of bonds, etc.). Silver Lake's term loan financing is bigger, longer-dated and cheaper than Icahn's, on a more levered capital structure. (Also: it comes from banks.) There are some benefits to actually having a deal I guess.3 Icahn's lenders, who only have to fund their loans if - umm, let's say, if some odd things happen - are charging correspondingly more for the wrong/at-least-odd-way risk.4
Icahn's letter to shareholders announcing the financing commitments is pleasingly Icahn-y, gloating that it should "put an end to the unwarranted speculation by Dell that our money would not be available" and then carefully explaining why Icahn's $10-ish per share tender offer is worth $20+ per share.5 And, sure. But if you're trying to decide whether Icahn's plans for Dell are his own private fantasy or something, y'know, real, the fact that 90% of his money comes from people who were already committed to the dream isn't an entirely positive sign.
Open Letter To Dell Stockholders And Dell Special Committee [Carl Icahn]
Icahn Says He Has Secured Financing for Alternative to Dell’s Buyout [DealBook]
Icahn seeks Dell meeting after securing $5.2 billion for bid [Reuters]
Icahn 13D with commitment letters etc. [EDGAR]
1.In whatever form the lenders have committed to finance. With no intervening MACs, etc. Lotta outs is what I'm saying. Here's Icahn on some of them:
The $14 Tender Offer is subject to a number of contingencies. First, the $14 Tender Offer would require that Dell stockholders defeat the Michael Dell/Silver Lake merger at the special meeting scheduled to be held on July 18, 2013 (the "Special Meeting"). Second, Dell stockholders would need to elect a Board that is willing to pursue the $14 Tender Offer transaction. As discussed in the Icahn/Southeastern Definitive Proxy Statement, filed with the Securities and Exchange Commission on June 26, 2013, Icahn and Longleaf Partners Fund have notified Dell that they intend to nominate six Icahn nominees and six Longleaf Partners Fund nominees, respectively, for election to the Dell Board at the 2013 Annual Meeting of Stockholders. Finally, the Dell Board would then need to approve the $14 Tender Offer transaction after reviewing it consistent with their fiduciary duties as directors, as well as cause Dell to have the financing for the $14 Tender Offer. While we believe these director nominees (or a majority thereof), if elected, will approve the $14 Tender Offer, there can be no assurance that the $14 Tender Offer transaction will occur, even if Dell stockholders defeat the Michael Dell/Silver Lake merger at the Special Meeting and even if some or all of the Icahn nominees and the Longleaf Partners Fund nominees are elected to the Board.
2.This is taken from:
- Annex A to the Commitment Letter, which lists commitments including 65.8% for Icahn and High River across various funds, and
- A package of back-to-back commitment letters whereby various buyers agree to buy down $320.5mm of Icahn and High River's commitments.
3.Of course Silver Lake's package was done a while ago and credit markets have moved. But here's Dell CDS:
That's 412ish on Friday, versus 438ish on February 5, when Dell signed the merger agreement (and Silver Lake's banks signed their commitment papers). So not a lot of change in Dell credit.
4. They also try to find ways to get paid in not-funded states of the world too; this is an odd deal:
As an unusual perk, lenders will share in the profits if a different but higher bid prevails. Joint lead arrangers will earn 7.5 percent of the difference between the winning bid and Dell's current $13.65 per share offer times the roughly 227 million shares that Icahn and Southeastern jointly own.
5.This, delightfully, hoists Dell's board on its own consultants:
If the $14 Tender Offer is fully subscribed, 670 million shares would remain outstanding. Based on the fiscal year 2015 BCG Base Case as set forth in Dell's Proxy Statement* (and even without taking into account the cost reduction opportunities identified by BCG), we believe the earnings per share for those remaining shares would be $3.72 per share. Assuming 75% of BCG's productivity cost reductions set forth in Dell's Proxy Statement are attained, earnings per share for those remaining shares would be as high as $5.51 per share. In other words, in our proposal tendering stockholders would receive $14 per share for at least 72% of their shares and, based on this BCG analysis, their remaining shares would be earning between $3.72 and as high as $5.51 per share. We therefore believe that it is self-evident our proposal is far superior to the $13.65 offered by Michael Dell/ Silver Lake.
We've talked about that "BCG 75% productivity case" before: it's the one whose DCF value, at $15.00-$21.25, floated uncomfortably over the deal-price line in JPMorgan's fairness presentation on the Dell buyout. If Dell can hit those numbers, everyone agrees they shouldn't take the Silver Lake deal.