A leveraged buyout of Dell Inc. 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 TPG Capital and Silver Lake Management LLC about going private, a person familiar with the matter said yesterday.
The company founded by Michael Dell in 1984 has an enterprise value of $19.1 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 — the average premium on technology LBOs in the past three years — the enterprise value of the Round Rock, Texas-based company would climb to about $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.
“You will need about three firms writing checks for $1.5 billion each,” Sachin Shah, a former special-situations and merger-arbitrage strategist at Tullett Prebon Plc in Jersey City, New Jersey, said in a telephone interview. “Even if it’s a growth story, that is going to be a hard sell for their own investors.”
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 also could collapse if firms fail to arrange financing or find a way to exit the investment.
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 yesterday to the least in 15 months. Yields surged 83 basis points, or 0.83 percentage point, to 4 percent, the highest level since October 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 at least 15 months with yields surging 91 basis points to 3.613 percent, the highest since October 2011, according to Trace.
The cost of insuring Dell’s debt from default for five years surged to the highest level in almost six months, according to data provider CMA. Credit-default swap contracts on Dell jumped 87 basis points yesterday, the biggest one-day increase since at least October 2004, to 286.8 basis points, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
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 buyouts and collect the large commitments fees that accompanied them. The bursting of the credit bubble, 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.
The largest buyout on record is the 2007 purchase of Texas utility TXU Corp., now Energy Future Holdings Corp., by KKR & Co., TPG and Goldman Sachs Capital Partners. The deal was valued at $43.2 billion, data compiled by Bloomberg show.
The debt markets have loosened up since 2010 as interest rates have fallen, setting the stage for larger buyouts. The biggest LBO since the onset of the financial crisis was the $7.2 billion KKR paid for Samson Investment Co., the Tulsa, Oklahoma- based oil and gas producer, in 2011.
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 as of yesterday.
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, financing a Dell buyout may pose a challenge, and not solely because of its size.
Because Michael Dell owns 15.7 percent of the company, a stake worth $3.3 billion, 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, leaving about $13.1 billion to be financed.
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,” Shah said. “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.
The financing also will turn on how much of Dell’s $11.3 billion in cash can be tapped for the deal. Some of the cash is in overseas subsidiaries and may not be accessible. Assuming half of the $11.3 billion can be used, that would leave about $7.5 billion in debt to make up the rest.
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 71 percent since the market bottomed in March 2009. They surged 13 percent at the close of trading in New York.
“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, have attempted to go private and had the talks dissolve over valuations or difficulty in financing deals. Fidelity National Information Services Inc.’s buyout talks fizzled in 2010 after the company sought a higher price than private-equity firms offered.
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. bought Compaq Computer Corp. for about $19 billion in 2002, Bloomberg data show.
“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,” said Topeka Capital’s White. “But to get the valuation he wants, Dell needs to exit the PC business.”
© Copyright 2013 Bloomberg News. All rights reserved.