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Dell, Inc - Deal Price Could Stretch To $14.25

 February 06, 2013 04:14 PM

(By Mani) Several investors were bombarding Dell, Inc. (NASDAQ: DELL) for agreeing to sell itself for a price less than $14, raising concerns over the shareholder approval for the deal.

But, given some puts and takes, the deal price could stretch to $14, appeasing annoyed investors such as Pzena Investment Management, which plans to vote against the deal, according to a report on CNBC. Pzena holds over 14 million shares in Dell, the world's third largest PC maker.

Texas-based Dell has agreed to be acquired for $13.65 a share, or $24.4 billion. The deal is to be funded with founder Michael Dell's existing 14 percent equity stake, a $2 billion loan from Microsoft Corporation (NASDAQ: MSFT), and equity contributions from Silver Lake Partners and MSD Capital.

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Assuming additional paid-in equity of $2 billion and a 5-year exit multiple of 4.5 times, the internal rate of return (IRR) should stand above 20 percent, suggesting the deal price could stretch to $14.25 equating to a 15 percent IRR, which is a common industry benchmark.

"We see possible upside to $14.25 should the deal require a higher premium to garner enough votes," UBS analyst Steven Milunovich wrote in a note to clients.

Considering the 2-year volume weighted average price is above $14, a deal price closer to the $14.25 level would have an easier time of gaining adequate shareholder approval.

[Related -Drama Aside, Dell Is A Quality Tech Stock]

Along with investors, ratings agencies have expressed concerns on the deal citing the high debt content. Fitch has cut Dell's long term issuer default rating to 'BB+' from 'A'. Moody's has downgraded its long term rating on Dell by two notches to 'Baa1' from 'A2,' while S&P has placed Dell on watch for a possible downgrade.

Be careful for what you wish, investors should beware that if the deal falls apart, the stock price could fall to $10.

Meanwhile, Microsoft's $2 billion loan, rather than equity, underscores the need to avoid anti-trust issues, especially from the European Union, or EU. Some extra diligence will be required, perhaps making the current deal spread of less than 2 percent less attractive on an annualized basis.

"A less attractive deal spread in-turn will likely lead to less risk-arb ownership and a higher weighting of existing, higher cost-basis, shareholders," Milunovich said.

The deal affords a typical 45-day "go-shop" period to seek other outside strategic proposals. iStock believes that there would be no competing bids as few companies would want to shell over $20 billion for a company whose fundamentals are currently weak.

A successful competing bidder who makes a qualifying proposal during the initial go-shop period would bear a $180 million termination fee while a failed bidder would be paying $450 million.



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