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Icahn Makes Another Offer for Dell as Shareholders Shrug
July 1, 2013 at
3:30 pm PT
Activist
investor Carl Icahn tried again to get the attention of Dell shareholders,
but judging by the lack of movement in the computer company’s shares, it
doesn’t seem to be working.
The day started with the
release of an open letter by Icahn to Dell shareholders and the special
committee of its board overseeing its efforts to go private. In that letter,
which you can read in full below and which was made public in a
filing
with the Securities and Exchange Commission, Icahn disclosed that he had
obtained more than $5 billion in financing to pay for his plan to
recapitalize Dell.
Icahn’s plan basically
calls for buying up 72 percent of Dell’s existing shares at $14, a price
higher than the $13.65 Dell founder and CEO Michael Dell and his partner,
private equity firm Silver Lake Partners, have offered for the entire
company.
Icahn, in his letter,
asked the board committee to “engage in a direct, face to face sit down
meeting with us” and argued that the board should consider his offer a
superior one made by a third party that would void a $270 million breakup
fee that Silver Lake would collect under certain conditions if its $24.4
billion offer fails.
Later, after markets
closed for trading in New York, Icahn, as he does every once in awhile,
got on the phone with CNBC and repeated
what he has said before: That if he were to gain control of Dell the
company, Dell the man would be out of a job. (See the video below.)
Dell’s board committee
responded by issuing a two-sentence statement saying it would be
happy to look over the specifics of Icahn’s offer. Previously it has
turned Icahn away, saying his plans suffered from a “liquidity gap.”
For its part, Icahn’s
partner, Southeastern Asset Management, issued a statement saying Icahn’s
latest offer “reinforces our view stated last week that Icahn is in the best
position to lead the development of a financed alternative transaction.”
Dell shares barely moved,
which suggests that most shareholders aren’t paying much attention to his
efforts. The shares closed down one cent at $13.31. The shares have more or
less remained range-bound since Feb. 5, when the company announced its plan
to go private, trading no lower than $13.09 and no higher than $14.51.
There’s a pretty good
chance that a lot of the shares — perhaps a third or more — not in the hands
of Michael Dell, Carl Icahn or others with a dog in the buyout fight now
belong to so-called “arbs” — investors who bought the shares at lower prices
and are just marking time betting that the buyout is approved and yields a
guaranteed payout. These shareholders are pretty much a lock for voting in
favor of the buyout.
There’s another wrinkle in
all this. Let’s say that the Dell-Silver Lake proposal fails at the meeting
of shareholders on July 18. To fully get control of the company, Icahn would
have to convince shareholders to fire Dell’s board of directors, too, and
replace them with the slate he and Southeastern
proposed on May 13.
Here’s why that won’t
happen: Michael Dell is still the largest shareholder in the company. And
while he can’t vote one way or the other on the buyout proposal, he will be
able to vote against Icahn’s slate in a subsequent vote and would have other
shareholders with him.
While there’s still a
chance that the Dell-Silver Lake proposal may not get approved — the opinion
of Institutional Shareholders will be crucial when it comes — the chances
that Carl Icahn gets control of Dell are almost non-existent.
Below is video of Icahn’s
latest chat with CNBC this afternoon, and below that his open letter to
shareholders and Dell’s special board committee.
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FOR
IMMEDIATE RELEASE
OPEN LETTER
TO DELL STOCKHOLDERS
AND DELL SPECIAL COMMITTEE
New York,
New York July 1, 2013: Carl Icahn and his affiliates today issued the
following letter to stockholders of Dell Inc. and members of the Dell
Special Committee.
Dear Fellow
Dell Stockholders AND Members of the Dell Special Committee:
$5.2
BILLION COMMITTED
We are
pleased to inform you that we have obtained lender commitments for the
$5.2 billion in debt financing that we said we would obtain (including
$1.6 billion from Jefferies Finance LLC). Jefferies has advised us that
they are completing the paperwork and the commitment letters will be
publicly filed after the market close today. With that we put an end to
the unwarranted speculation by Dell that our money would not be
available.
OUR $14
DOLLAR DELL SELF TENDER PROPOSAL
With the
$5.2 billion in committed debt financing, $7.5 billion from cash on the
Dell balance sheet and $ 2.9 billion to be derived from the sale of
receivables, Dell will have the aggregate $15.6 billion necessary to
conduct our proposed self tender by Dell for approximately 1. 1 billion
Dell shares at $14 per share (the “$14 Tender Offer”). Following
completion of the $14 Tender Offer Dell will have approximately $4.9
billion of cash remaining. Also, our lender commitments permit an
additional $1.5 billion revolver for Dell should that become necessary.
Icahn and
Southeastern Asset Management have agreed not to tender into the $14
Tender Offer. Therefore, even if the $14 Tender Offer is fully
subscribed, stockholders will receive $14 per share for at least
approximately 72% of their Dell stock — and an even higher percentage if
other stockholders believe, like us, that Dell’s best days are ahead of
it and decide to hold onto their Dell shares.
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.**
Dell
stockholders should note that, despite Dell’s recent drumbeat of rapid
deterioration, the recently reported performance in 1QFY14 and
management’s operational decisions particularly regarding PC pricing,
Dell has not retracted its Final Fiscal Year 2014 Board Case EBITDA of
$3.6 billion (as disclosed in the Dell Proxy Statement), nor any of the
projected BCG cases for fiscal years 2014 to 2017. Further, based on
statements by Dell’s management, we believe that Dell’s recent
aggressive PC pricing discounts are designed to buy meaningful market
share while sacrificing near-term margins – a strategy that we believe
will benefit future owners. Senior management, including Brian Gladden,
CFO, and Tom Sweet, VP Corporate Finance, both highlighted this fact on
the Q1’14 earnings call:
“In many
cases, these are accounts that we feel very good about [with respect to]
the long-term profitability and the impact on our cash flow over time.
So while we may not see that showing up as a positive in the P&L in the
short term, we think for the long term it’s the right thing to do to get
ourselves back in price position to scale the business,” as per Brian
Gladden.
“We are
investing and acquiring new customer accounts that will benefit our
long-term profitability and cash flow,” as per Tom Sweet.
(emphasis
added)
We
therefore can only ask, based on these statements by management and the
BCG analysis mentioned above, why is the Board recommending a ”
freeze-out” transaction that denies stockholders the right , if they so
choose, to participate in the ” long term” potential upside that Dell
management themselves see for Dell.
A MESSAGE
TO THE DELL SPECIAL COMMITTEE
Now that
our financing is committed and in place, we call upon the Dell Special
Committee to engage in a direct, face to face sit down meeting with us
(not through its highly paid advisors as has occurred in the past). As
always, it is our desire that our proposal be treated as a Superior
Proposal made by an Excluded Person under the Merger Agreement, and
thereby save stockholders $270 million in additional break-up fees that
may otherwise be claimed by Silver Lake.
It is
mystifying to us how any independent Board which is charged with duties
as fiduciaries can recommend to shareholders a $13.65 per share ”
freeze-out” merger with Michael Dell/Silver Lake as superior to a
proposal that provides stockholder the choice to receive $14 per share
for at least 72% of their shares and, based on their own projections and
on the BCG analysis mentioned above, to own their remaining shares
earning between $3.72 and as high as $5.51 per share. We believe that it
would be a sad outcome for stockholders and would, to say the least,
reflect terribly on all who are involved in this process if, after
purchasing shares at what we perceive to be a substantially undervalued
price of $13.65 per share, Michael Dell and Silver Lake earned
substantial returns on their investment while other stockholders are
forced to sell. It would be even worse if Dell were sold (or broken up)
by Michael Dell and Silver Lake in a transaction or transactions with
one or more strategic acquirers for a very large profit.
We
therefore ask the Board to find our proposal to be a “Superior Proposal”
or at the very least to change its recommendation regarding the Michael
Dell/Silver Lake transaction
We look
forward to hearing your answer in the very near future.
Sincerely,
Carl C.
Icahn
Chairman
Icahn Enterprises, L.P. |
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