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Monday, 27 June 2016

Give me an I

Could Silver Lake quietly be rooting for Icahn?

Carl Icahn may have a secret admirer. The uppity billionaire fired his latest salvo in the battle over Dell late last week, proposing a half-baked leveraged recapitalization. The plan could be a ploy to get Silver Lake Partners and founder Michael Dell to sweeten their $24.4 billion bid. It’s hard not to wonder, though, if the buyout firm isn’t quietly rooting for Icahn.

Not long after Silver Lake launched its offer in February, the bad news started flowing. Dell slashed by nearly half its annual forecast for adjusted operating income. Then research firm IDC reported the worst quarterly decline in worldwide PC shipments since it started tracking them on that basis almost two decades ago.

It was enough to spook one suitor. Blackstone Group, which had Dell’s former head of strategy advising it and had already sounded out other potential chief executives, opted not to proceed with a bid, citing the industry data and the company’s “eroding financial profile.”

Even if Silver Lake was similarly rattled, backing out would be tough. By association, Michael Dell’s position at the company would be jeopardized, and the terms of their agreed deal contain an unusually constraining material adverse change provision. It excludes anything that affects the industry, the economy or even the company’s ability in most cases to meet its own forecasts. What’s more, Silver Lake would have to pay a $750 million breakup fee, more than half the amount of capital it’s planning to use in the deal.

The firm specializes in technology buyouts so could be more confident than Blackstone of the turnaround possibilities. But the coming weeks could be telling. Bidders trying to win hard-fought takeover battles don’t necessarily raise their offers, but they often try to win over shareholders with public statements, letters and even newspaper ads.

Of course, Icahn’s newest proposal, with Southeastern Asset Management, is flaky. It isn’t fully financed and involves risky stub equity. Silver Lake may not feel the need to dignify it with a full-throated response. Then again, if shareholders vote against a sale to Silver Lake and Dell does a different deal in the next 12 months, the company would have to pay Silver Lake at least $180 million and as much as $450 million. That’s a lot of reasons to scrutinize Silver Lake’s body language.

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Context News

Billionaire investor Carl Icahn and Southeastern Asset Management on May 9 proposed a leveraged recapitalization of Dell that would give shareholders $12 of cash for every share they own and allow them to keep their stock. The plan from two of the PC maker’s biggest shareholders rivals a $13.65-a-share takeover offer in February from Silver Lake Partners with company founder Michael Dell.

On May 13, the special committee of Dell’s board that is considering the transaction asked Icahn and Southeastern for further information, including how they would finance their offer and who would run the company.

In their proposal, Icahn and Southeastern said that after the planned distribution, each Dell share would be worth between $1.98 and $5.35, assuming they trade at between four and six times expected annual pretax earnings of 50 cents to 89 cents a share.

The duo said that if the Dell board won’t accept its proposal, it wants the company to combine a vote on the Silver Lake transaction with an annual meeting to elect a new board of directors, at which time Icahn and Southeastern said they would put up their own slate.

Icahn had previously offered $15 a share for 58 percent of Dell while private equity firm Blackstone Group had proposed paying over $14.25 a share. Blackstone later said it opted not to proceed with its offer after seeing industry data and updated financial information from Dell.

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