There continues to be disagreement on the Street as to how to play the leveraged buyout of Dell (DELL) proposed by CEO Michael Dell, though analysts believe the deal can still go through despite shareholder objections to the offer price of $13.65.
Toni Sacconaghi with Bernstein Research cut his rating on the stock today from Outperform to Market Perform, while keeping his $15 price target, writing that “Ultimately, we believe that the company’s proposed MBO will likely be successful (at or modestly above the current offer of $13.65/share).”
“We note that a small risk exists that shareholders will not approve the deal, which would likely create material near-term downside for the stock, but overall, we see the risk-reward for the stock as being largely in balance.”
And Maxim Group’s Ashok Kumar cut his rating to Hold from Buy, writing that the offer price is actually not that far off from what investors would settle for:
We believe that the current offer is within 10% of the investor�s reservation price. Beyond this threshold, the returns would not compensate for the entailed risk. At the current offer the post transaction capital structure, net-debt/EBITDA ~2x, will give the company a margin of safety. About half of the estimated $3 billion in annual FCF will be subsumed by interest payments. This will give Dell the operational flexibility to reconfigure its portfolio [�] In spite of objections from a minority of shareholders, the transaction is likely to consummate at close to the current offer. A break-up is not an option as the company would lose its cash cow legacy business. Michael Dell�s participation, 14% of common plus contribution of additional cash up to $1 billion, is critical to this deal closure. As such we do not see any white knight suitors.
On the other hand, Brian White of Topeka Capital Markets reiterates a Buy rating, while raising his price target to $16 from $13.50, writing that “pressure mounts for a sweeter bid.”
Actually, White is not far from Kumar in his assessment that there’s some upside to the bid, but not a lot:
Last week’s announcement by Dell to go private at $13.65 (total value of $24.4 billion) has set off an investor revolt around the price of the transaction and we believe a higher bid will need to emerge. For example, Southeastern Asset Management (#1 outside investor) has prepared for battle and believes $24 per share is a fair price, while T. Rowe Price (#2 outside investor) announced plans to vote against the transaction and other shareholders have voiced a similar view. Also, lawsuits are emerging. When speculation around a deal emerged a few weeks ago, we indicated that a price tag of $15 to $18 made sense and we believe the take out price will need to fall within this range [�] Given the discontent with the current takeout price, our revised 12-month price target of $16 reflects a more reasonable take out bid. Our new price target reflects a P/E of 8.8x (or 6.8x ex- cash) our CY13 EPS estimate and is based on a weighted average valuation of what we view as an appropriate multiple for the Company’s profit exposure to software, services and hardware. We believe this $16 target is a reasonable price for all parties involved and anything much higher could prove to be a deal killer. This higher price will add approximately $4.2 billion to the original $24.4 billion take out value. Using a $24 take out price would add $18.5 billion to the takeover price and equates to a CY13 straight P/E of 13.1x our CY13 EPS estimate. This multiple is higher than IBM’s 12x P/E multiple, a valuation that we believe is difficult to justify given the differences between the two companies.
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