Buyout Undervalues Dell, Says One Large Shareholder

Apparently, Southeastern Asset Management, the largest outside shareholder of Dell, agrees with us that the buyout price of $13.65 vastly undervalues Dell's true value. For our thesis on Dell, please see yesterday's post. While we considered Dell from a free cash flow and dividend paying potential point of view, Southeast looked at it from a hidden assets point of view. Over the years, Dell have made numerious acquisitions totaling $7.58 per share. Within Dell's vast corporate structure, their must be parts that are valued by the current market place and can readily be unlocked. I suspect that is part of Silver Lake's strategy. Dell has failed to become IBM. Thus it is time to unwind the empire. The parts are surely worth more than the sum. The letter Southeastern wrote to SEC is well thought out and worth quoting at length:

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.

 

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.