Dell Projects Icahn Buyout Has $3.9 Billion Funding Gap

A Dell Inc. board committee said Carl Icahn’s takeover offer is “unrealistic” because of a projected $3.9 billion shortfall in funding needed to pay a proposed dividend and run the company.

Based on the estimated gap, the value of Icahn’s planned $12-a-share dividend would be reduced to $9.35, or to $8.50 if Icahn and partner Southeastern Asset Management Inc. are the only shareholders to opt for the equity stub instead of cash, the board committee said in a regulatory filing today.

The committee is pointing out shortcomings in Icahn’s offer ahead of a shareholder vote next month, seeking to rally support for a $24.4 billion plan by Chief Executive Officer Michael Dell and Silver Lake Management LLC to take the third-largest PC maker private. Icahn and Southeastern in May proposed an alternative buyout plan, offering investors $12 a share in cash or stock while letting them retain stakes in a public company.

“The special committee is making assumptions adverse to Icahn’s bid,” said Erik Gordon, a business and law professor at the University of Michigan in Ann Arbor. “The lower they make it, the tougher it is on Icahn and the easier it is to justify Michael’s price that has been criticized as being too low.”

CEO Dell is offering to buy the company for $13.65 a share in cash -- then make it more competitive in private amid a declining PC market. The deal requires approval by a majority of shareholders, excluding Michael Dell, who has a 15.6 percent stake.

Funding Calculations

Icahn, who along with Southeastern owns almost 13 percent of Dell shares, would finance his proposal with Dell’s existing cash and about $5.2 billion uncommitted debt.

Neither Icahn, nor Lee Harper, a Southeastern spokeswoman, returned calls seeking comment.

While Icahn and Southeastern’s proposal projects $17.3 billion in liquidity, based on 20 percent of Dell’s shareholders opting for his offer, the company will actually have $13.4 billion, according to the special board committee.

In calculating the shortfall, the special committee and its financial advisers subtracted $1.4 billion in debt maturing through April 2014 and $500 million based on cash-generation projections that are weaker than Icahn’s estimate. They also accounted for an additional $1.7 billion in cash requirements and about $300 million in termination fees that weren’t part of Icahn’s projection, according to the filing.

‘Best Alternative’

Last week, the board committee urged shareholders to vote for founder Michael Dell’s buyout at a meeting set for July 18. After contacting more than 70 potential strategic and financial buyers during a “go-shop” period, Michael Dell’s offer “is the best alternative available -- in a challenging business environment,” Dell said in a May 31 filing.

Dell, based in Round Rock, Texas, rose less than 1 percent to $13.43 at the close in New York. The CEO’s offer reflects a 25 percent premium to the company’s share price on Jan. 11, the last trading day before Bloomberg News reported that Dell was in talks to go private.

In March, Icahn offered $15 a share in cash for as much as 58.1 percent of the stock, Dell said in at the time.

Then, in May, he teamed with Southeastern to offer investors $12 a share in cash or additional Dell stock. The payout would dilute Dell shares, which they said would have a value of $1.98 to $5.35 apiece, in addition to the dividend.

Icahn has said that he plans a proxy battle to install his own slate of directors in the event that the special committee concluded that his proposal isn’t superior.

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