If indeed the reported talks to take Dell private are serious, it would amount to one of the biggest leveraged buyout deals since before the financial crisis of 2008. It would also be risky for those involved. But it’s totally doable.
That’s the conclusion of analyst Chris Whitmore of Deutsche Bank Securities, who ran some numbers on a potential buyout in a research note issued to clients today. Estimating a buyout would require between $20 billion and $25 billion in outside capital, and could value Dell as high as $16 a share, amounting to a hypothetical 30 percent premium over its closing price Monday. “In short, we believe a transaction is do-able on paper from a balance sheet capacity, interest coverage and leverage standpoint,” Whitmore wrote. “The hurdle is deal size and the large amount of capital required to execute such a transaction.”
The talks are said to involve Silver Lake Partners and TPG Capital, and are being described to The Wall Street Journal as “serious.” Other investment firms and maybe even a pension fund might get involved in the deal as well. JP Morgan Chase is involved in managing the deal process.
One key assumption: Dell would pay about $4 billion in taxes to repatriate about $14 billion in cash and investments held outside the US. From there it would raise about $22 billion of additional equity and debt using a combination of bank debt and bonds. Excess cash would be used to pay down existing debt and maintain Dell’s capital expenditures and pay taxes at a higher rate of about 30 percent.
Whitmore outlined two scenarios. In the first Dell’s revenue would grow by about 2 percent in the first year after the close of the buyout and remain flat for the next four years. In that case Dell’s margins on an EBITDA basis could inch upward from 9.2 percent in the first year to 9.5 percent in the fifth. In this scenario, private equity investors could generate returns in the range of 30 to 35 percent.
In the second scenario, an admittedly more bearish one, revenues don’t grow and EBITDA margins decline from 9.2 percent to 8.2 percent by the fifth year. In this scenario PE investors would bring in an annual rate of return of about 20 to 25 percent, Whitmore writes.
“We expect buyout speculation to underpin Dell’s valuation and shine a light on what we’ve long argued is an undervalued asset,” Whitmore wrote. “A deal at $15 to $16 a share would generate substantial returns for any potential buy-out group while still offering material upside to Dell’s current price.” He raised his price target to $15 and rates the shares a “Buy.”
A private equity buyout would also amount to a way out for Dell. The company has been involved in a long term turnaround that has yet to impress investors. Long a power in personal computers, it has sought to transform itself into a strong player in the world of enterprise IT, buying storage, software and service companies. The problem is that it is still widely exposed to both consumer and business PCs, and both segments are suffering. Market research firms Gartner and IDC both estimated in recent days that the worldwide market for personal computers contracted by about 3.5 percent.
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