If you work (or follow) Wall Street you know the most talked about deal in town right now is the potential Dell buyout by Silver Lake Partners together with Founder Michael Dell, who holds 15.7% of the company.
Andrew Bary argued in Barron's Sat. January 19th "How to Give Dell''s Shareholders a Fair Deal" that
a buyout at $14/ share amounts to insiders trying to steal the companywhich is the conclusion that a $14-$15/sh. buyout substantially undervalues the company expected to earn $1.70/sh in its current fiscal year. It seems the race is heating up with Dell reportedly hiring Evercore Partners to search for alternative suitors, Bloomberg LP reported.
If you look at the oversimplified LBO model enclosed, at around $15.40 (only a 20% premium, a very low and unlikely premium) notice a Buyer would get a very hefty IRR of 28% on a one-year exit (atypical and unlikely, for illustration purposes only). Normally a PE buyer holds a business for three to seven years. I assumed 65% Debt to 35% Equity buyout formula and likely overcalculated the cost of borrowing, which in recent deals hovered around Libor + 350 b.p., even less.
An all-equity buyout, on the other hand, would give a buyer only a 12% IRR (after exiting in 12-months, as stated, for simplicity purposes).
Whether this deal gets done or not it remains to be seen-there are value investors involved (Southern Asset Management, Dodge &Cox), activists (Dan Loeb, Bill Ackman, Carl Icahn).
The deal is entirely doable, at least on paper. Valuewalk:
– Under the assumption that Dell repatriates foreign cash (and pays taxes), analysts put together a multi-scenario analysis with various levels of equity and debt raised in differing financial performance scenarios. They believe a transaction is do-able on paper, from a balance sheet capacity, interest coverage and leverage standpoint, but its challenge is deal size and the large capital amount required to execute this transaction.
| Attachment | Size |
|---|---|
| DellBuyout.xls 20.5 KB | 20.5 KB |
Few huge assumptions that your model hinges on: - international cash is repatriated with minimal tax consequences - EBITDA growth of 4.7% - 20% premium
I think those three assumptions might be a little aggressive, and I think for Silverlake to be taking on a deal this size for mid-20% IRR on these major assumptions seems risky. Not saying your calc is wrong, but there must be something else Silverlake/Dell is seeing from this equation. I haven't done any work on Dell, but it seems like if Dell can grow EBITDA 4.7% a year, the public markets would give it more credit, no?
Doubt anything will happen. Since when did PE firms start leaking their potential acquisitions so they can pay a higher premium? Not happening boys.
Hey guys - I can't see the model...could you point it out to me?
--- Forget about it - my bad Found it
you got the most important part of the model wrong - increase the fees by about 8-10x
You're right. JP Morgan doesn't work for free.
Blackstone CEO Schwarzman at the World Economic Forum Davos 2013 (Bloomberg Jan. 23rd interview)
Quidem recusandae molestiae voluptas est fugiat. At omnis ipsum consequatur nihil omnis aut et. Distinctio perferendis est consequatur recusandae eum corporis fugit.
Omnis reprehenderit officiis enim. Et qui nostrum illum voluptatem. Nemo unde voluptas praesentium facilis laboriosam.
Sunt amet voluptatem velit deleniti voluptatibus autem velit. Perferendis vero eum ullam blanditiis in ad. Id occaecati dolorum blanditiis molestias aliquid ullam vel.
Atque qui quidem enim sed quia. Non eligendi voluptatem neque voluptate dignissimos iusto voluptates earum. Rerum incidunt adipisci ut aut et.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...