Icahn, Southeastern hit back in Dell battle

The activists assert that the proposed management buyout would be a lousy deal for shareholders and criticize the board for going along with it.

By Forbes Digital Jun 25, 2013 12:46PM

Less than 12 hours after Dell's (DELL) special board committee accused the opponents of the $24.4 billion management-led buyout of fuzzy math, the activists struck back using a similar attack.

In a new presentation made public this afternoon, hedge fund titan Carl Icahn and Southeastern Asset Management presented figures showing Dell would be less indebted after their alternative idea than if the $13.65-a-share management buyout happens. Dell’s special committee has concluded the exact opposite, throwing its weight behind the proposal from founder Michael Dell and private equity shop Silver Lake Partners. Unlike the Michael Dell-Silver Lake deal, Icahn and Southeastern would leave a part of the company public through a leveraged recapitalization and a make a $14-a-share tender offer, allowing investors to cash out.

Meanwhile, Icahn and Southeastern in the presentation repeated their argument that Michael Dell is basically absconding with the company. That the bid is too thinly priced. That Michael Dell and his PE partners could reap huge profits by taking the company private (then breaking it up or eventually going public again), while other shareholders wouldn't see any of that return.

The activists met this morning with Institutional Shareholder Services, hoping the big proxy adviser would decide in their favor and help persuade other large Dell investors to side with them. The rebel group, which additionally includes T. Rowe Price, Yacktman Asset Management and Pzena Investment Management, controls about 18% of Dell. It needs firms like UBS, Citigroup and Vanguard -- all major Dell investors -- to join their descent for it to successfully scuttle the management-led buyout.

Icahn and Southeastern figure their idea would increase Dell's debt-to-EBITDA ratio to 1.7. By contrast, they estimate the management buyout would more be than double that, reaching a debt-to-EBITDA ratio of 3.7.

They also took the opportunity to hammer home several other points. Icahn and Southeastern criticized the board for too quickly jumping into bed with Michael Dell, approving his deal and setting expensive hurdles for any challenger. And they again pointed to Dell's $13 billion in recent acquisitions and its enterprise businesses as major sources of future growth -- and reasons why they want to stick around despite Dell's miserable performance lately.

One thing they didn't address any further: financing. The special committee has concluded that Southeastern and Icahn are $2.9 billion short of the funding necessary to complete the leveraged recap. The directors will likely continue to draw attention to this until Southeastern and Icahn can somehow dismiss the criticism. It's a major point if the committee's math is correct: It concludes the activists' offer could fall to nearly as low as $8 a share.

Releasing the I.S.S. slideshow is the latest move in a protracted battle for control of the PC maker. Carl Icahn, the 26th richest person in the world with a $20 billion fortune, and ally Southeastern have traded insults, as well as competing, often contradictory figures and estimates, with Michael Dell and the special committee. Icahn and Southeastern are familiar with what it takes to reform a company like Dell, having joined forces just last to rebuild Chesapeake Energy.

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