Dell Pressed to Sweeten LBO Bid Amid T. Rowe Opposition
Dell Inc., the computer maker that agreed to a $24.4 billion buyout this month, is coming under increased pressure to make the deal more attractive to shareholders who say the transaction undervalues the company.
Options include boosting the offer price or increasing the dividend, analysts said. Private-equity buyers have also given investors a chance to co-invest in a transaction to line up support for a buyout that met with resistance. Dell’s biggest outside investors, T. Rowe Price Group Inc. and Southeastern Asset Management, oppose the $13.65-a-share proposal, saying it undervalues the No. 3 maker of personal computers.
In the largest leveraged buyout since the financial crisis, founder Michael Dell and private-equity firm Silver Lake Management LLC seek to take Dell private after the company lost almost one-third of its value in 2012 amid stiffening competition in mobile and cloud computing. The buyers need approval by a majority of shareholders, excluding Michael Dell, and their chances diminish as the opposition gains momentum.
“I don’t think the current offer will get the shareholder vote, especially given the fact that the two largest shareholders have come out early and against,” said Louis Meyer, an analyst at Oscar Gruss & Son Inc.
Opposing investors will first push for a higher price, he said. Failing that, they will probably “press for some sort of recapitalization, such as a a special dividend,” he said.
Dell slipped less than 1 percent to $13.77 at the close in New York. The shares closed at $13.79 yesterday, the highest since May 2012. The buyout offer is 25 percent higher than the $10.88 closing on Jan. 11, the last trading day before LBO talks became public.
T. Rowe Price and Southeastern, which together own more than 10 percent of the stock, said Dell is worth more than its buyers have offered.
“We believe the proposed buyout does not reflect the value of Dell and we do not intend to support the offer as put forward,” T. Rowe Price Chairman Brian Rogers said yesterday in a statement. Southeastern sent a Feb. 8 letter to Dell’s board expressing “extreme disappointment” with the offer.
The deal includes a so-called majority-of-the-minority voting rights protection, meaning it must be approved by a majority of shareholders excluding Dell, people familiar with the matter said last week. There will be two votes on the deal by investors, one with Michael Dell and his 14 percent stake and one without, the people said. Both must affirm the deal.
Dell’s buyers may need to make the terms more attractive, said Shaw Wu, an analyst at Sterne Agee & Leach Inc.
“It’s a possibility that they have to raise the price,” said Wu, who is based in San Francisco and rates the stock neutral.
Given the amount of debt already factored into the proposal, it won’t be easy to increase the terms materially, Wu said. Dell is seeking $13.8 billion in loans to finance the deal, according to regulatory filings. There’s little leeway to take on more debt since pruning more of Dell’s low-margin personal computer business would crimp the cash flow needed to pay it off, said Abhey Lamba, an analyst at Mizuho Securities USA Inc., who said that the buyers may need to offer as much as $15 a share to seal the deal.
Other investors who have voiced opposition to the offer include Richard Pzena, founder of Pzena Investment Management, who said last week that he will vote against the transaction. Pzena’s firm held 12.7 million Dell shares, or 0.7 percent of the company, as of Dec. 31, data compiled by Bloomberg show.
Donald Yacktman of Yacktman Asset Management said in an interview on CNBC today that he’d vote against the proposal at the current price. Harris Associates LP’s William C. Nygren said on Feb. 5 that he would “raise a ruckus” if his firm were to find out that better alternatives exist to the one that Dell’s board approved.
Dell and other directors were sued last week in Delaware Chancery Court by investor Catherine Christner, who said the board is shortchanging shareholders.
Southeastern, which holds a 8.4 percent stake in Dell, said the computer maker is worth at least $24 a share. Southeastern said Dell’s business-computing acquisitions, along with its server and technology-services operations, are worth more than the offer. Southeastern hired D.F. King & Co. for consulting and related services, according to a filing.
“In a going-private transaction it’s not atypical to see activism or a shareholder lawsuit,” said Donna Hitscherich, a senior lecturer at Columbia Business School and director of its private-equity program.
Michael Dell is seeking to take back majority control of the company he founded in 1984 after losing ground in the PC market and as consumer demand shifted to tablets from competitors, including Apple Inc.
David Frink, a spokesman for Dell, referred to a statement issued last week saying that the proposed deal “offers an attractive and immediate premium for stockholders and shifts the risks facing the business to the buyer group.” A so-called “go-shop” period “provides stockholders an opportunity to determine if there are alternatives that are superior to the present offer,” he said.
Shareholders unhappy with buyout offers have successfully pressed buyers to pay more in the past. In 2007, a private- equity group lifted its offer for Biomet Inc., a medical devices maker, to $11.4 billion from $10.9 billion after the group’s previous offer was criticized by a shareholder and an advisory firm as too low.
The same year, hedge fund Highfields Capital Management LP and other investors got private-equity firms Bain Capital LLC and Thomas H. Lee Partners LP to raise their offer for Clear Channel Communications Inc., a radio chain and outdoor advertiser, and to give them the option to co-invest in the deal. Clear Channel ultimately agreed to a lower price amid declines in radio advertising sales and leveraged lending.
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