Activist investor Carl Icahn urged Dell Inc to pay out $15.7-billion (U.S.) in a special dividend, joining a growing chorus of opposition to founder Michael Dell’s plan to take the world’s No. 3 personal computer maker private.
Icahn wrote to Dell’s board to propose a leveraged recapitalization and said that the $24.4-billion go-private deal “substantially undervalues the company”.
Icahn’s arrival on the scene typically puts companies – and their boards – on guard, because the outspoken billionaire has a reputation for aggressively demanding changes by building up stakes.
“When Carl Icahn talks, people need to listen – especially, in this case, the Dell board,” said Dr. Anthony Michael Sabino, a professor in the law department at John’s University’s Peter J. Tobin College of Business.
The likelihood of alternative proposals prompting Dell to sweeten his offer has increased since a handful of major shareholders have spoken out against the deal, analysts said.
“Recent events have raised the level of scrutiny on the situation, which could end up increasing the take-private price, Wells Fargo analyst Maynard Um wrote in a note.
Michael Dell has partnered with private equity house Silver Lake and Microsoft Corp to offer $13.65 a share to buy out the company he created in a college dorm room in 1984.
But shareholders representing almost 14 per cent of Dell shares, led by Southeastern Asset Management with a stake of more than 8 per cent including options, have said they will vote against the proposed buyout.
Southeastern, run by activist investor Mason Hawkins, has said Dell could borrow money to make a major share repurchase or break up the company and sell units separately.
T. Rowe Price has also spoken out against the deal.
Icahn, in a letter dated March 5 and published on Thursday by the Special Committee of the Board of Directors of Dell, said his interests held a substantial stake in Dell. He did not disclose his exact shareholding.
CNBC, citing unnamed sources, reported on Wednesday that Icahn had accumulated about 6 per cent of Dell’s shares. That would make him the third-largest shareholder after Southeastern and Michael Dell himself.
Icahn proposed a special dividend of $9 per share, which would include $4.26 per share derived from $5.25-billion in new debt.
He said the special dividend, when added to a “stub” value of $13.81 per share, would deliver a total value of $22.81 per share – a 67 per cent premium to the go-private deal.
Dell shares were largely flat at $14.28 on the Nasdaq on Thursday. They have risen 8 per cent since trading closed on Feb. 4, the day before Dell announced its plan to go private.
Dell said Icahn had asked its board to commit to his proposal to “avoid a proxy fight”.
“We see no reason that the future value of Dell should not accrue to ALL the existing Dell shareholders – not just Michael Dell,” Icahn wrote in the letter.
Jefferies & Co analyst Peter Misek said most investors were likely to favor an increased bid by Dell. But a rival offer, he said, was unlikely.
“Icahn would likely be satisfied with a raised bid to $15, which we think would be higher than the potential stock price realized from a leveraged recap,” Misek wrote in a note.
“While a break-up of Dell would increase the probability of a strategic investor buying a portion of the business, we still see this as unlikely due to the size of the PC business and Michael Dell’s desire to lead a shift toward enterprise hardware/software.”
Dell said it would welcome Icahn’s participation in a “go-shop” process to find alternative proposals, which the company announced on Wednesday.
Icahn, meanwhile, said he would propose directors to implement his plans if his ideas were not accepted. He requested that Dell’s board combine the vote on the go-private transaction with an annual meeting to elect a new board of directors.
Dell has said it would hold the meeting for the vote on the go-private deal in June or early July.
If the board were to decline to combine the vote, Icahn said he anticipated “years of litigation” will follow.
Icahn Enterprises LP would provide a $2-billion bridge loan for the “prompt payment” of the dividend, if his slate of directors was elected, Icahn said in the letter.
Icahn himself would provide an additional $3.25-billion bridge loan to Dell if necessary, he wrote.
“This is far from over,” said Sabino. “Expect a lot of pulling and tugging between multiple rivals here, with Dell as the prize.”