(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.
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.
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.