Dell buyout proposal fails to impress shareholders

Founder and equity firm will have to sweeten bid to take over computer maker after two biggest outside investors reject their offer

PUBLISHED : Thursday, 14 February, 2013, 12:00am
UPDATED : Thursday, 14 February, 2013, 4:53am

Dell, the computer maker that agreed to a US$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.

Dell's biggest outside investors, T. Rowe Price and Southeastern Asset Management, oppose the US$13.65-a-share proposal, saying it undervalues the number-three maker of personal computers.

In the largest leveraged buyout since the financial crisis, founder Michael Dell and private equity firm Silver Lake Management seek to take Dell private after the company lost almost one-third of its value last year 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 opposition gains momentum.

"I don't think the offer will get the shareholder vote, especially as the two largest shareholders have come out early and against," said Louis Meyer, an analyst at Oscar Gruss & Son.

Opposing investors would first push for a higher price, he said. Failing that, they would probably "press for some sort of recapitalisation, such as a special dividend".

Dell rose less than 1 per cent to US$13.79 in New York on Tuesday, the highest since last May. The buyout offer is 25 per cent higher than the US$10.88 closing on January 11, the last trading day before buyout talks became public.

T. Rowe Price and Southeastern, which together own more than 10 per cent of the stock, said Dell was worth more than its buyers had 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 on Tuesday. Southeastern sent a February 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 would be two votes on the deal by investors, one with Michael Dell and his 14 per cent stake and one without, the people said. Both must affirm the deal.

Dell's buyers might need to make the terms more attractive, said Shaw Wu, an analyst at Sterne Agee & Leach. "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 would not be easy to increase the terms materially, Wu said. Dell is seeking US$13.8 billion in loans to finance the deal.

There was 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, who said the buyers might need to offer as much as US$15 a share.