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Friday, 19 December 2014

Groucho deal

Dell's $24 bln LBO involves a club of one

Dell’s $24 billion leveraged buyout involves essentially a club of one. And Silver Lake Partners, the sole private equity firm included, isn’t even really the charter member. Michael Dell is contributing his 14 percent stake in the PC maker he founded, cash and an investment from his MSD Capital investment arm. Time was not long ago that mega-deals required a team of buyers. For now, they remain more exclusive.

Despite the easy availability of money, Dell represents the largest buyout since 2007, according to Thomson Reuters data. Investors are desperate for higher yielding securities and even Microsoft has agreed to chip in $2 billion to help preserve the ailing personal computer market. With about $4.6 billion of EBITDA this year, Dell should be able to shoulder the roughly $12 billion debt needed for the deal.

Finding equity these days is the bigger challenge. A multi-billion-dollar injection usually would necessitate at least two and often several more firms. The buyout industry has largely sworn off them after the troubles such club deals caused during the 2005-2007 boom. Too many big-stake owners make it harder to agree on strategy, exits become more difficult and investors in LBO firms wind up with overly correlated returns. Plus, the U.S. government is still investigating private equity collusion.

The technology industry, especially a segment in decline, makes Dell an even more difficult buyout target. Silver Lake specializes in such areas, but few other firms are as comfortable in the niche. Obsolescence is hard to model and can make a mockery of the detailed financial assumptions underlying buyouts.

That’s essentially what left Michael Dell in a class by himself. His stock, wealth and desire to turn around his eponymous company made this special kind of club deal possible. He will account for about three-quarters of the deal’s equity. Few other companies have a structure that would allow for anything on Dell’s scale. Call it the Groucho Marx principle. As long as private equity firms are unwilling to belong to any club that would have them as members, Dell won’t have much company in the mega-deal society.

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Context News

Dell said on Feb. 5 it agreed to be acquired by founder Michael Dell and private equity firm Silver Lake in a deal that values the computer maker at $24.4 billion. The price of $13.65 a share represents a 25 percent premium to the company’s value on Jan. 11, the last trading day before rumors of a leveraged buyout were reported.

Michael Dell, who owns a 14 percent stake in the company, will contribute his shares as well as personal cash and cash from his investment firm, MSD Capital. Microsoft has agreed to provide a $2 billion loan and additional financing has been committed by Bank of America Merrill Lynch, Barclays, Credit Suisse and RBC.

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