The obvious stumbling block is the potential size of the deal. Dell's market cap has moved up to $23 billion following the two-day rally on the news reporters that something could be in the works. That suggests a deal would have to be at a valuation of $25 billion or higher. That's not impossible, but it wouldn't easy, and would surely require a group of multiple large pocketed players to pull off. Note that founder Michael Dell already owns about 16% of the company, which would presumably reduce the capital required to complete a transaction assuming he were involved.
The sheer size of the deal suggests it would be too large for a single financial investors, so any deal would likely involve multiple partners. Analysts also notes that a leveraged buyout might slow Dell's acquisition-driven strategy to transform from a PC-centric hardware company to a more diverse enterprise IT vendor.
Here is a rundown on some of the commentary from the Street on the potential for a Dell LBO:
- Abhey Lamba, Mizuho Securities: He keeps his Neutral rating and $10 target, but see the appeal of such a deal. "Dell’s high free cash flow yield combined with cheaper financing options do make it easier for the math to work in its favor in a leveraged transaction," he writes. "Additionally, management could work on its transition strategy without the pressure of meeting quarterly targets. Investors could cut the less profitable portions of Dell’s business (consumer and low-end PCs, and third party software), reduce costs and make the organization more focused and leaner before going public again." But he also notes that "the deal size and strategic reasons could make the transition even harder ... unless the private-equity investors are willing to continue injecting capital to support strategic decisions, the company’s transition to be more enterprise focused could become even harder."
- Peter Misek, Jefferies: He thinks a deal in the $15-$17 a share range is possible, "with the biggest variable being finding private equity firms willing to contribute ~$5 billion in equity alongside Michael Dell's stake". He adds that the Jefferies leveraged finance desk "sees $10 billion as the upper bound due to the market's ability to absorb that size rather than Dell's leverage." He notes that private equity firms rarely invest more than $1.5 billion in equity per deal, and that many avoid club deals, "which could make $5 billion a tough target to achieve."
- Chris Whitmore, Deutsche Bank: His view is that the deal looks good on paper."Our preliminary analysis suggests it would require ~$20-25 billion of external capital to take DELL private," he writes. "In short, we believe a transaction is do-able on paper from a balance sheet capacity, interest coverage and leverage standpoint. The hurdle is deal size and the large amount of capital required to execute such a transaction ...we believe the value creation opportunity for private equity investors centers around the ability to borrow at ~6-7% to acquire an asset generating ~20% free cash flow yields."
- Steve Milunovich, UBS: He sees an LBO of Dell as reasonable; but he's not sure is makes sense strategically for a company trying to shift its business to enterprise IT and away from commodity PCs. "Strategically, a deal seams counterintuitive as a private Dell likely would be limited in its acquisition strategy, a key component in its transition from PCs to enterprise. However, an LBO could be an appropriate vehicle for the company to aggressively reduce its obligations and repatriate offshore earnings."
- Brian White, Topeka Capital: "One of the big problems that Dell faces is the transition from a PC-focused company to a broad-based IT vendor," he writes. "The key reason for this is that Dell's PC business is constantly under the microscope by investors and the secular challenges over the past couple of years have only made matters worse. As such, going private would provide Dell with the time necessary to complete this enterprise build out and avoid the scrutiny of the public markets."
- Aaron Rakers, Stifel Nicolaus: "While we believe investors should consider that such a large deal ($18-$20 billion) is very rare, we do believe discussions make sense given Dell’s FCF story, ongoing transformation from client/PCs to enterprise solutions (a transformation that we continue to view as a positive; now at ~35% of revenue from enterprise solutions and ~55% of gross margin dollars), and the possibility of making more aggressive moves without public market scrutiny."
- Ben Reitzes, Barclays: "While we wouldn’t be surprised if Michael Dell were seeking such a transaction, we believe a go-private transaction would present a few challenges for Dell," he writes. "First, with a large debt load, we believe Dell would have a more difficult time acquiring smaller enterprise companies – making it harder to diversify away from PCs. We believe that technology companies in secularly challenged businesses need financial flexibility for this reason. Over the last few years, Dell has been highly acquisitive in areas that offer more positive growth and margin prospects, while PCs have declined faster than expected. We believe the option for larger acquisitions needs to be on the table in the future. Second, we believe a go-private transaction makes sense only if Dell’s earnings power was stable – and backed by real recurring revenues. However, Dell’s earnings power may be at risk from a potential decline in PC-related maintenance revenue streams over the next few years."
Dell on Tuesday gained 88 cents, or 7.2%, to $13.17.
Update: CNBC's David Faber is reporting that a deal could come in the $13.50-$14 a share range.
