MEMPHIS, Tenn., Feb. 8,
2013 /PRNewswire/ -- Southeastern Asset Management, Inc. the
largest outside shareholder of Dell Inc. (NASDAQ: DELL), today
announced that it has sent a letter to the Board of Directors of
Dell noting that it believes Dell's proposed go-private transaction
grossly undervalues the Company, and will not vote in favor of the
transaction as currently structured. Southeastern intends to
retain and avail itself of all options at its disposal to oppose
the announced transaction, including, but not limited to a proxy
fight, litigation claims and any available Delaware statutory appraisal rights.
Southeastern beneficially owns on behalf of its investment advisor
clients approximately 8.5% of Dell's outstanding shares (including
options). Southeastern filed the letter with the SEC in an SC
13D today.
In its letter, Southeastern notes that it believes that the
proposed transaction, under which Dell's public shareholders would
receive only $13.65 per share,
clearly represents an opportunistically-timed bid to take the
company private at valuations far below Dell's inherent value, and
deprives public shareholders of the ability to participate in the
future upside of the Company.
The full text of the letter is as follows:
February 8, 2013
Board of Directors
Dell Inc.
One Dell Way
Round Rock, TX 78682
Attention: Lawrence P. Tu
Senior Vice President, General Counsel and Secretary
Dear Board of Directors:
Southeastern Asset Management, Inc. beneficially owns on behalf
of its investment advisory clients approximately 8.5% of Dell's
outstanding shares (including options), making us your largest
outside shareholder. We are writing to express our extreme
disappointment regarding the proposed go-private transaction, which
we believe grossly undervalues the Company. We also write to
inform you that we will not vote in favor of the proposed
transaction as currently structured. We retain and intend to
avail ourselves of all options at our disposal to oppose the
proposed transaction, including but not limited to a proxy fight,
litigation claims and any available Delaware statutory appraisal rights.
We expect the Board of Directors to perform its responsibility
to thoroughly review all alternatives to the proposed transaction
to deliver maximum value to Dell's public shareholders. We
would have endorsed a transformative transaction that would have
provided full and fair value to Dell's public shareholders,
including a leveraged recapitalization or a go-private type sale
where current shareholders could elect to continue to participate
in a new company with a public stub. Unfortunately, the
proposed Silver Lake transaction falls significantly short of that,
and instead appears to be an effort to acquire Dell at a
substantial discount to intrinsic value at the expense of public
shareholders.
The Board of Directors has a fiduciary duty to consider any
transaction, and particularly an insider transaction such as this,
in light of what is in the best interest of all of Dell's
shareholders. We believe that the proposed transaction, under
which Dell's public shareholders would receive only $13.65 per share, clearly represents an
opportunistically timed bid to take the Company private at a
valuation far below Dell's intrinsic value, and deprives public
shareholders of the ability to participate in the Company's
substantial future value creation. Specifically, the
following supports our valuation analysis:
Southeastern believes that straightforward, modest valuations
of Dell result in per share valuations vastly in excess of the
$13.65 offer price. Net cash
per share after deducting structured debt within Dell Financial
Services (DFS) is $3.64. Dell
Financial Services has a book value of $1.72 per share. In addition, since
Michael Dell resumed his role as CEO
in 2007, the Company has spent $13.7
billion or $7.58 per share on
acquisitions intended to transform the Company into a sustainable
IT business and lessen its reliance on the PC business. During
Dell's June 2012 analyst day, Dell
Chief Financial Officer Brian
Gladden said that in aggregate the acquisitions to that
point had delivered a 15% internal rate of return. The Company has
neither taken nor discussed the need to take any write downs of
these acquisitions. We therefore conservatively believe the
acquisitions are worth a minimum of their cost. Taken
together, these items total $12.94
per share before we even look at the other businesses.
The current bid therefore places a value of less than
$1.00 per share on the remainder of
the Company. By any objective measure, that is woefully
inadequate. Specifically, none of the following are accounted
for above:
- As one of the dominant players in X86 servers, including the
DCS division serving "hyperscale" customers, the server
business alone is easily worth $8.0
billion, or $4.44 per
share. This value excludes the results of SonicWall,
Wyse and Quest which are included in the "Acquisitions" total above
and which are carried in the "Servers and Networking"
division.
- The part of the "Services" segment not captured in the
"Acquisitions" line above consists mainly of Dell's "support and
deployment" activities. This business has less correlation
with the PC business and more closely follows the expansion of data
center activity. In the last quarter, a quarter in
which PC revenue declined by 19%, this support and deployment
business grew by 5%. Estimates of its revenues are approximately
$4.8 billion, at which we believe it
would produce at least $1.0 billion
of operating income. This operating income should be
assigned a higher multiple than that attributed to the PC business.
Our estimate of its value is at least $7.0
billion, or $3.89 per
share.
- The PC business generates roughly $27.0 billion of revenue and we estimate
approximately $1.3 billion of
operating profit. While we could accept the most bearish case
in assuming the "death of the PC," this business is certainly worth
more than zero. Even the PC's harshest critics would accept
that the PC will be around for more than a few years. A
multiple of operating income of 4 gives this business a value of
approximately $5.0 billion, or
$2.78 per share. We would note
that Lenovo (primarily a PC company), with net income of around
$700 million, has a market value of
$11.0 billion.
- The Software and Peripherals segment not captured above
should be worth at least $3.0
billion, or $1.67 per share,
which works out to a multiple of less than 7 times operating
income.
- We subtract $1.00 per share to
account for capitalized unallocated expenses.
Adding the value of these operating segments to the
$12.94 outlined above and subtracting
out an estimated $1.00 per share of
DFS value embedded within the segments yields a total corporate
value approaching $24.00 per
share. This obviously exceeds the $13.65 offer and does not even take into account
Dell's strong product distribution capability, especially in the
small to medium size business space (SMB). This SMB
distribution strength is the result of the Company's heritage and
legacy of selling directly to the end customer. Competitors
like HP, IBM, Oracle, and Cisco do not have comparable distribution
strength in SMB. This competitive advantage should enable
Dell to continue to be able to sell its portfolio of enterprise
solutions and services to a growing SMB market.
Valuation Summary
(per
share)
|
Net cash (1)
|
$
|
3.64
|
DFS (2)
|
|
1.72
|
Acquisitions since 2008 (3)
|
|
7.58
|
Server Business (4)
|
4.44
|
Support and Deployment (5)
|
3.89
|
PC Business (6)
|
2.78
|
Software and Peripherals (7)
|
1.67
|
Unallocated Expenses (8)
|
-1.00
|
DFS value embedded in segments
(9)
|
-1.00
|
Total
|
$
|
23.72
|
(see below for footnotes)
|
|
|
In short, the evidence is
overwhelming that shareholders are being deprived of their
proportionate share of the Company's true value, which is much more
than $13.65 per share.
We believe the Board of Directors had several alternatives that
would have produced a far better outcome for public shareholders
than the proposed transaction.
One alternative the Board of Directors could have implemented
instead of approving the Silver Lake transaction is a leveraged
recapitalization that would have facilitated the payment of a
special dividend to public shareholders. As opposed to
forcing shareholders out at $13.65,
this option would have allowed all shareholders to receive a large
cash payment while retaining ownership of significant future cash
flow streams. The revenue mix of Dell's business has changed as a
result of strategic acquisitions, resulting in the fact that
roughly half of the annual free cash flow generated comes from
higher growth enterprise businesses while the other half comes from
legacy businesses linked to the PC.
As highlighted in an example below, the Company could have paid
shareholders a substantial special dividend (close to $12.00 per share in the example below) while
still retaining the ability to generate anywhere from $1.14 to $1.34 per share of free cash flow per
year (same as the Company's measure of "non-GAAP" earnings). Using
the midpoint of the free cash flow range of $1.24 based on the estimates below, the Company
would produce over $2.2 billion in
free cash flow annually. This level of cash flow generation
provides interest coverage of 4:1 based on the numbers below.
There are other variations of this general idea, such as a larger
immediate dividend and smaller resulting free cash flow. The
Company could have undertaken the following three steps to create
the ability to pay a special dividend:
1) Realize stated book value for DFS,
while maintaining origination, servicing, and the strategic
customer relationship. This would mean proceeds of roughly
$3.1 billion (DFS receivables less
associated structured financing debt).
2) Pay the federal corporate tax to
bring home offshore cash. This would raise at least $9.25 billion of cash for payout while obviously
eliminating any future interest income. If the Company were to
explore ways to move the overseas cash back in a more tax efficient
manner, then the special dividend could be increased by the amount
of tax saved.
3) Undertake new borrowings of
$9.0 billion, with an expected
interest rate of 7%.
Implementing these three steps could produce a special dividend
of almost $12.00 per share:
(in
millions of USD, except per share item)
|
|
|
DFS
proceeds
|
$
|
3,100
|
Foreign
cash realized after tax
|
9,250
|
New
borrowings
|
|
9,000
|
Available
for special dividend
|
21,350
|
Shares,
RSUs, and in-the-money options
|
|
|
1,800
|
Potential dividend per share
|
|
$
11.86
|
|
|
|
|
|
|
|
However, even after this special
dividend, an amount that represents 85% of the buying group's
offer, there would still be available to shareholders well over
$1.00 of free cash flow per
share:
Pro
Forma Free Cash Flow
(in
millions of USD, except per share item)
|
|
|
|
|
|
Low
Estimate
|
High
Estimate
|
EBITDA (1)
|
$
|
4,500
|
$
|
5,000
|
Estimated Cap
Ex
|
|
-600
|
|
-600
|
|
|
|
|
|
Free EBITDA
|
|
3,900
|
|
4,400
|
Less: Foregone DFS income(2)
|
|
-275
|
|
-275
|
|
|
|
|
|
Pro Forma Free EBITDA
|
|
3,625
|
|
4,125
|
Existing Interest Expense
|
|
-265
|
|
-265
|
Interest from new debt
|
|
-630
|
|
-630
|
|
|
|
|
|
Pro forma pretax free EBTDA
|
|
2,730
|
|
3,230
|
Estimated tax
|
|
-685
|
|
-810
|
|
|
|
|
|
Free cash flow
|
|
2,045
|
|
2,420
|
Shares
|
|
1,800
|
|
1,800
|
|
|
|
|
|
Pro
forma FCF/share
|
$
|
1.14
|
$
|
1.34
|
|
|
|
|
|
1 Range of EBITDA estimates from Citi,
Credit Suisse, Deutsche, UBS, Raymond James, Bernstein,
Goldman
2 Estimate (undisclosed)
|
A second alternative the Board of Directors could have
implemented instead of approving the Silver Lake transaction is
another form of recapitalization that would be a Dutch auction or
some other structure that would allow shareholders to tender shares
for cash based on a price or range of prices for a determined
amount of shares. In this form of recapitalization, instead of
using the cash specified in the example above for a dividend, the
Company would use that cash systematically to repurchase
shares from those holders desiring to sell. The effect would be a
dramatic reduction in the share count which would leave the
remaining holders with increased ownership of the free cash flow
stream cited above.
We understand that Michael Dell
is not bound to the Silver Lake transaction and can participate in
facilitating a superior offer. We are concerned that given
the participation of Michael Dell in
this transaction, that a traditional go shop process is not
sufficient to ensure that the Company receives superior
offers. Specifically, as stated above, our value for the
entire Company is approximately $24.00 per share, but we also believe that
selling multiple business units to strategic buyers could easily
exceed $13.65 per share.
Additionally, the Board of Directors should aggressively seek a
proposal that differs from Silver Lake's thereby not forcing public
shareholders to sell for a price so far below a reasonable
valuation. A different buyer could serve the same purpose as Silver
Lake, undertake similar leverage, but importantly and more fairly,
could allow a reasonable percentage of the "rolled-in" equity to
come from existing shareholders who choose to do so. While
functioning much like a typical private equity transaction, this
would actually leave a public "stub," which would allow public
shareholders to remain investors in Dell's future. Several previous
transactions have successfully implemented this type of structure
and it merits study by the Board of Directors.
There are materially superior alternatives to the proposed
transaction, and we hope that in addition to supporting one of the
alternatives, Michael Dell would
participate. If given the option, other existing shareholders could
provide as much or more equity than Michael
Dell currently proposes to do, which would lead to superior
levels of equity contribution and more financial flexibility to
serve Dell's customers and to grow.
We understand that given the restrictions the Board of Directors
has imposed upon itself in connection with approving the
ill-advised transaction announced on February 5, 2013, the Board of Directors would
not be able to pursue the first two recapitalization alternatives
stated above at this time. However, we are confident our
fellow shareholders are as disappointed as we are with the
proposed $13.65 per share price, and the Company could pursue
such alternatives when the non-conflicted shareholders ultimately
vote against the proposed transaction.
In closing we reiterate our opposition to the proposed Silver
Lake transaction and have serious concerns about the Board of
Director's approval, which penalizes shareholders by forcing them
to exit at a significant discount to intrinsic value rather than
adopting alternatives such as a recapitalization that would have
better rewarded shareholders. We expect the Board of Directors to
satisfy its fiduciary obligations to all shareholders and to
consider superior alternatives that treat public shareholders
fairly.
Sincerely,
O. Mason Hawkins, CFA
Chairman & Chief Executive Officer
G. Staley Cates, CFA
President & Chief Investment Officer
Notes:
1) Cash & cash equivalents,
short-term investments , and long-term investments of $14.2 billion; total debt, excluding $1.4 billion of DFS structured debt, of
$7.6 billion; as of 11/2/12
2) DFS book value of $3.1 billion as of 11/2/12
3) Cash spent on acquisitions, net of
cash acquired, as of 11/2/12 since
fiscal year 2008
4) Assumes $8
billion of revenue and $880
million of operating income excluding acquired businesses
reported within Servers & Networking
5) Assumes $4.8 billion of revenue and $1 billion of operating income from "Support
& Deployment"
6) Assumes $27
billion in revenue and $1.3
billion of operating income from "Mobility" and "Desktop
PCs"
7) Assumes $9
billion in revenues and $450
million in operating profit from "Software and
Peripherals"
8) Assumes $300 million of unallocated expenses
9) Assumes $250-$300 million of DFS net interest income
embedded within the segments
(Photo: http://photos.prnewswire.com/prnh/20130208/NY57273-INFO
)
ABOUT SOUTHEASTERN ASSET MANAGEMENT
Southeastern Asset Management, Inc., headquartered in
Memphis, Tenn., is an investment
management firm with $34 billion in
assets under management acting as investment advisor to
institutional investors and the four Longleaf Partners Funds:
Longleaf Partners Fund, Longleaf Partners Small-Cap Fund, Longleaf
Partners Global Fund and Longleaf Partners International Fund, as
well as two Irish domiciled UCITS Funds: Longleaf Partners Global
UCITS Fund and Longleaf Partners US UCITS Fund. Southeastern was
established in 1975, and the first of the Longleaf Partners Funds
was launched in 1987.
SOURCE Southeastern Asset Management, Inc.