Dell LBO to Test Market’s Appetite for Return to Boom Era
A leveraged buyout of Dell Inc. (DELL) would require Michael Dell and private-equity firms to accomplish a feat not seen since 2007: pulling together more than $20 billion in equity and debt to finance the deal.
Dell, the personal-computer maker that lost almost a third of its value last year, has been in talks with buyout firms including Silver Lake Management LLC about going private, a person familiar with the matter said yesterday. The Round Rock, Texas-based company has climbed 21 percent since Bloomberg reported the discussions yesterday.
Michael Dell and his backers would have to persuade lenders to raise the biggest debt package for an LBO since the peak of the 2005-2007 buyout boom, when banks were more than eager to finance mega-sized deals and collect the large fees that accompanied them. While debt markets have loosened up since 2010 as interest rates have fallen, the biggest LBO since the onset of the financial crisis was the $7.2 billion KKR & Co. paid for Samson Investment Co., the Tulsa, Oklahoma-based oil and gas producer, in 2011.
“The general consensus is that $6 billion is the upper limit of a buyout transaction in this environment,” said David Fann, chief executive officer of TorreyCove Capital Partners LLC, a La Jolla, California-based firm that advises private- equity managers and investors. “This will require a major investment-banking initiative.”
A deal could be announced as soon as this week, said one person, who asked not to be identified because the talks are private. Discussions could collapse if firms fail to arrange financing or find a way to exit the investment.
The company founded by Michael Dell in 1984 has an enterprise value of $20.7 billion, which is stock-market capitalization plus debt, minus cash. Assuming Dell’s stock fetches 30 percent more than its closing price on Jan. 11 -- about the average premium on technology LBOs in the past three years -- the enterprise value of the company would climb to $22 billion. The last buyout to exceed that amount was Blackstone Group LP’s acquisition of Hilton Worldwide Inc., announced in July 2007 and valued at $26.2 billion, according to data compiled by Bloomberg.
The bursting of the credit bubble in mid-2007, brought on when subprime-mortgage borrowers began defaulting in record numbers, choked off the flow of debt as banks were stuck with loans they couldn’t sell to investors and pulled back.
Dell bonds tumbled and credit default swaps surged after Bloomberg News reported the talks yesterday, amid concerns the deal would add to the company’s $5.9 billion of outstanding bonds, according to data compiled by Bloomberg.
Dell’s $400 million of 4.625 percent bonds due April 2021 plunged today to the least in 15 months. Yields surged 63 basis points, or 0.63 percentage point, to 4.936 percent, the highest level since the debt was issued in March 2011, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Dell’s $600 million of 5.875 percent notes due June 2019 dropped to the lowest level in more than two years with yields surging 114 basis points to 4.752 percent, the highest since March 2010, according to Trace.
The cost of insuring Dell’s debt from default for five years surged to the highest level on record, according to data provider CMA. Credit-default swap contracts on Dell jumped 69 basis points today to 355 basis points, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
Sales of junk bonds worldwide soared 35 percent to a record $426 billion in 2012, according to data compiled by Bloomberg. Yields on speculative-grade, or junk, bonds fell to a record low of 6.3386 percent yesterday, according to Bank of America Merrill Lynch’s Global High-Yield Index, which was started in December 1997 and contained 3,098 securities.
High-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.
Still, even with low interest rates and high demand for junk bonds, financing a Dell buyout may pose a challenge, and not solely because of its size.
Michael Dell owns 16 percent of the company, a stake worth $3.3 billion, so the buyers would have to raise about $18.7 billion in additional debt and equity. Based on recent averages for deals, Dell’s buyout partners would have to kick in equity of about 30 percent, or $5.6 billion. That may require Silver Lake to bring in additional investors.
Silver Lake, based in Menlo Park, California, is seeking $7.5 billion for its latest flagship fund, Silver Lake Partners IV LP, with the option of gathering as much as $10 billion, according to a marketing document viewed by Bloomberg News.
After the equity, there would be about $13.1 billion to be financed. The financing also will turn on how much of Dell’s $11 billion in cash can be tapped for the deal. “Substantially all of that amount” is held overseas, Dell said in a regulatory filing.
That creates a tax liability for anyone trying to repatriate it. Assuming half of the $11 billion can be used, that would leave about $7.5 billion in debt to make up the rest.
Today, most buyouts with solid market positions and stable or growing cash flows draw debt financing of four or more times earnings before interest, taxes, depreciation and amortization. Dell’s market share has slipped and its Ebitda fell in 2012, meaning it may not be able to borrow at the same level as healthier companies.
“It’s generating free cash flow but that free cash flow is declining because of competition,” said Sachin Shah, a former special-situations and merger-arbitrage strategist at Tullett Prebon Plc in Jersey City, New Jersey. “Because of the iPad, nobody wants to buy PCs and nobody wants to buy laptops.”
Dell’s Ebitda is estimated to be $4.9 billion for the fiscal year ending Jan. 31, compared with $5.4 billion the previous year, data compiled by Bloomberg show.
Yet banks might provide just $6 billion to $7 billion of financing, or 1.4 times to 1.6 times Dell’s trailing 12-month Ebitda, according to a New York-based technology analyst who asked not to be identified because he isn’t permitted to speak to the media.
The added debt load would heavily weigh on Dell’s ability to grow.
Michael Dell has a net worth of $13.7 billion and ranks 65 on the Bloomberg Billionaires Index. MSD Capital LP, his investment-management firm, oversees about $9 billion, according to Bloomberg estimates. Dell could use part of that wealth to help finance the transaction.
Dell shares have lagged behind the Standard & Poor’s 500 Index by 54 percentage points since the market bottomed in March 2009.
“It makes a lot of sense,” said Brian White, an analyst at New York-based Topeka Capital Markets Inc. “The valuation on this stock is absolutely insulted. Michael Dell wants to change the focus of Dell without having the microscope of a public stock.”
Computer companies, unlike food producers or government contractors, are less-than-ideal LBO candidates as rapid changes in technology and consumer adoption can make their earnings unpredictable.
Other technology companies, including disk-drive maker Seagate Technology Plc (STX), have attempted to go private and had the talks dissolve over valuations or difficulty in financing deals. Fidelity National Information Services Inc. (FIS)’s buyout talks fizzled in 2010 after the company sought a higher price than private-equity firms offered.
“Dell certainly can survive in its current form because they’re doing a good job on the enterprise side and the balance sheet is strong,” White said. “But to get the valuation he wants, Dell needs to exit the PC business.”
A Dell buyout could rival KKR’s $27.5 billion LBO of electronic-commerce company First Data Corp. in 2007. It could also be the largest acquisition in the computer industry since Hewlett-Packard Co. (HPQ) bought Compaq Computer Corp. for about $19 billion in 2002, Bloomberg data show.
“Most big buyout firms are on record telling limited partners that they aren’t pursuing mega deals anymore,” said TorreyCove’s Fann, referring to investors in private-equity funds. “Never say never.”
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