Southeastern Asset Management Voices Disapproval of Proposed Dell Buyout

Andrew Klips  |

Some shareholders of Dell, Inc. (DELL), especially those that went bottom fishing since last September, were probably ecstatic to hear that founder, CEO and namesake Michael Dell and investment firm Silver Lake Partners were looking to buy the beleaguered computer maker and take it pubic for about $13.65 per share.  Others with a stake, like Southeastern Asset Management, are not the slightest bit happy.

Southeastern holds 8.5 percent, or 147.28 million, of Dell’s outstanding shares and says that the buyout offer is a lowball price and that they will vote against the deal.  The investment firm believes that a more accurate valuation is $23.72 per share based on their breakdown of Dell’s business, including its financial services unit and recent acquisitions, amongst other things.

In a letter to the Dell board that was filed with the SEC on Friday, Southeastern expressed their “extreme disappointment” in the proposed go-private offer that “grossly undervalues” the company, in their opinion.  The letter told the Dell board that Southeastern would use all resources available to contest the transaction, including a proxy fight and litigation.

Memphis, Tennessee-based Southeastern, which is led by Staley Cates and O. Mason Hawkins, believes the offer that’s on the table “appears to be an effort to acquire Dell at a substantial discount to intrinsic value at the expense of public shareholders.”

The deal values Dell at about 8 times earnings, which is generally considered a low figure.

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The letter read that there are several options for Dell, including a leveraged recapitalization or parting-out the company and selling divisions separately, that would provide a better outcome for shareholders.

Forbes has estimated that if a deal transpires in the range of $13.50 to $13.75 per share that has been offered, Southeastern could lose more than $1 billion.  With 147.28 million shares, the $10 extra per share in the Southeastern valuation of Dell would at least put them back in the green on their investment.

Dell has offered no commentary on the Southeastern letter at this point.

At the time that rumors wafted through Wall Street that Michael Dell and Silver Lake were readying to make the $24.4 billion offer, the deal was at a 25 percent premium to Dell’s closing price on January 11 (the day before the rumors surfaced).  The company is supposed to currently be shopping itself for better offers, but Southeastern believes the Michael Dell’s position with the buyout offer may impact the quest.

Looks like there is a storm brewing around the situation that could get more volatile.  Michael Dell holds about 245 million shares, or 14.1 percent of the company.  Southeastern on their own with only 8.5 percent likely would not have much of an impact on thwarting the deal, but other shareholders, such as Schneider Capital and Alpine Capital Research, have also chimed-in with their disapproval.  Southeastern rattling the bushes with the now public letter may bring forth additional support for their contentions.  It’s just a matter of how much.

Of the few analysts that have commented publicly, the feeling is that if the deal doesn’t go through, the stock price will take a substantial hit.

Shares of Dell have steadily climbed to the proposed acquisition price over the past month, including closing on Friday at $13.63.

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