January 18, 2013 at 12:14 PM EST
DELL Deal Can Get Done, Says Bernstein; Southeastern Potential Obstacle
Bernstein Research's Toni Sacconaghi today reiterates an Outperform rating on shares of Dell ( DELL ) and a $12.82 price target, reflecting on reports by Bloomberg and The Wall Street Journal in the last 24 hours saying that private equity firms might announce a leveraged buyout of the company in coming weeks. Bloomberg's Serena Saitto , Jodi Xu , and Cristina Alesci last night wrote that Silver Lake Partners is close to getting $15 billion in funds for a buyout, and that a deal "could be announced as soon as January 22nd." The Journal's Matt Wirz and Anupreeta Das yesterday wrote that bankers have been contacting other firms such as BlackStone Group about coming in on a deal, though talks remain focused on Silver Lake and a $25 billion deal. Sacconaghi thinks details of a deal have been leaked in recent days, in order to get feedback from the market, and also to allow time for other buyers to emerge. As it happens, founder and CEO Michael Dell will have to recuse himself at some point, as the board of directors mulls any eventual bid, and "He would also, ironically, be at odds with shareholders and the special committee - his incentive will be to argue that the business is worth less and is riskier than investors may believe, while shareholders and the special committee will seek to ensure that they are getting the best possible price." Sacconaghi writes that private equity has three reasons for wanting a deal, namely that Dell stock is cheap , at 8 times forward earnings per share, the P.E. firms have "large amounts of cash to be deployed," and founder and CEO Mike Dell "is a committed partner, and his incentives and 16% equity stake are strongly aligned with the private equity buyers." Some of that hinges on repatriating the company's $14.2 billion in cash, most of which is overseas, he writes. With respect to that, Sacconaghi observes, "We suspect that some of Dell's offshore cash is being generated in tax jurisdictions with higher tax rates, and if Dell chose to repatriate smaller amounts of cash, its effective repatriation tax rate would be lower." Nothing would be different, he thinks, if a deal were to happen, given that "We do not foresee any significant changes in Dell's strategy or a break-up of the company." "To us, the deal is principally a 'buy low/sell higher' transaction."
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