Icahn Threatens Dell With “Years of Litigation” Over Buyout
Dell’s board of directors confirmed what CNBC first reported yesterday in a filing with the U.S. Securities and Exchange Commission that contains the letter that Icahn sent, and which you can read below.
In the letter, Icahn argues that the proposal to buy shareholders out at a price of $13.65 a share “substantially undervalues” the company. Instead, Icahn proposes that in the event that the proxy vote to go private fails — and there’s a good chance that it will — the company would pay shareholders a special dividend of $9 a share, to be financed by a combination of existing cash on hand, receivables and debt.
If the board refuses the proposal, Icahn intends to fight: Submit a new slate of directors who would be committed to implementing the special dividend. Icahn would then provide as much as $5.25 billion in bridge loans, should they be needed.
Icahn also threatens “years of litigation” in the event the go-private deal does go through.
In response, the special committee of Dell’s board handling the go-private business said in the filing that it is running a “go-shop” process to seek out third parties who might make a better offer. Yesterday, Bloomberg News reported that Hewlett-Packard, Lenovo and private equity fund Blackstone are using that go-shop process to kick Dell’s tires and get a look at Dell’s books, but that an alternative bid is unlikely from them.
Here’s what Dell’s special committee had to say about Icahn’s approach:
“The Special Committee is currently conducting a robust ‘go-shop’ process to determine if there are third parties interested in proposing alternative transactions that could be superior for Dell’s public shareholders to the going-private transaction — and we welcome Carl Icahn and all other interested parties to participate in that process. Evercore Partners, an independent financial advisor to the Special Committee, is actively soliciting third parties to determine their potential interest and is incentivized to find a superior proposal if one exists.
The process will run through March 22, 2013, after which negotiations will continue if a potentially superior proposal emerges. Our goal is to secure the best result for Dell’s public shareholders — whether that is the announced transaction or an alternative.”
And here’s Icahn’s letter:
Icahn Enterprises L.P.
March 5, 2013
Board of Directors
One Dell Way
Round Rock, Texas 78682
Attn.: Laurence P. Tu
Senior Vice President, General Counsel and Secretary
Re: Agreement and Plan of Merger, dated as of February 5, 2013
(the “Going Private Transaction”).
Dear Board Members:
We are substantial holders of Dell Inc. shares. Having reviewed the Going Private Transaction, we believe that it is not in the best interests of Dell shareholders and substantially undervalues the company.
Rather than engage in the Going Private Transaction, we propose that Dell announce that in the event that the Going Private Transaction is voted down by shareholders, Dell will immediately declare and pay a special dividend of $9 per share comprised of proceeds from the following sources: (1) $4.26 per share, or $7.4 Billion, from available cash as proposed in the Going Private Transaction, (2) $1.73 per share, or $3 Billion, from factoring existing commercial and consumer receivables as proposed in the Going Private Transaction, and (3) $4.26, or $5.25 Billion in new debt.
We believe that such a transaction is superior to the Going Private Transaction because we value the proforma “stub” at $13.81 per share using a discounted cash flow valuation methodology based on a consensus of analyst forecasts. The “stub” value of $13.81 combined with our proposed $9.00 special dividend gives Dell shareholders a total value of $22.81 per share, representing a 67% premium to the $13.65 per share price proposed in the Going Private Transaction. We have spent a great deal of time and effort in determining the $22.81 per share value and would be pleased to meet with you to share our analysis and to understand why you disagree, if you do.
We hope that this Board will agree to adopt our proposal by publicly announcing that the Board is committed to implement our proposal if the Going Private Transaction is voted down by Dell shareholders. This would avoid a proxy fight.
However, if this Board will not promise to implement our proposal in the event that the Dell shareholders vote down the Going Private Transaction, then we request that the Board announce that it will combine the vote on the Going Private Transaction with an annual meeting to elect a new board of directors. We then intend to run a slate of directors that, if elected, will implement our proposal for a leveraged recapitalization and $9 per share dividend at Dell, as set forth above. In that way shareholders will have a real choice between the Going Private Transaction and our proposal. To assure shareholders of the availability of sufficient funds for the prompt payment of the dividend, if our slate of directors is elected, Icahn Enterprises would provide a $2 billion bridge loan and I would personally provide a $3.25 billion bridge loan to Dell, each on commercially reasonable terms, if that bridge financing is necessary.
Like the “go shop” period provided in the Going Private Transaction, your fiduciary duties as directors require you to call the annual meeting as contemplated above in order to provide shareholders with a true alternative to the Going Private Transaction. As you know, last year’s annual meeting was held on July 13, 2012 (and indeed for the past 20 years Dell’s annual meetings have been held in this time frame) and so it would be appropriate to hold the 2013 annual meeting together with the meeting for the Going Private Transaction, which you have disclosed will be held in June or early July.
If you fail to agree promptly to combine the vote on the Going Private Transaction with the vote on the annual meeting, we anticipate years of litigation will follow challenging the transaction and the actions of those directors that participated in it. The Going Private Transaction is a related party transaction with the largest shareholder of the company and advantaging existing management as well, and as such it will be subject to intense judicial review and potential challenges by shareholders and strike suitors. But you have the opportunity to avoid this situation by following the fair and reasonable path set forth in this letter.
Our proposal provides Dell shareholders with substantial cash of $9 per share and the ability to continue as owners of Dell, a stock that we expect to be worth approximately $13.81 per share following the dividend. We believe, as apparently does Michael Dell and his partner Silver Lake, that the future of Dell is bright. We see no reason that the future value of Dell should not accrue to ALL the existing Dell shareholders — not just Michael Dell.
As mentioned in today’s phone call, we look forward to hearing from you tomorrow to discuss this matter without the need for us to bring this to the public arena.
Very truly yours,
Icahn Enterprises L.P.
By: Carl C. Icahn
Chairman of the Board