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Investors sense real chance for Dell buyout

by Scott Stuart  |  Published January 16, 2013 at 10:54 AM
servers227x128.jpgThe prospects of a Dell Inc. buyout gives a deal-hungry risk arbitrage market something to chew on. And perhaps more: Some arbs think a deal has better than even chances of coming to fruition.

Chatter this week quickly moved from buyout talks being in a very preliminary stage to reports that TPG Capital and Silver Lake have been in negotiations for several months about a potential deal with interest in financing from Credit Suisse Group, Bank of America Merrill Lynch, Barclays plc and RBC Capital Markets.

The latter speculation is most intriguing because the prospects of a Dell buyout clearly turn on the availability of financing. The company's $3 billion in free cash flow make the situation plausible and clearly banks are taking the opportunity seriously, one arb said. At this point the news flow seems to put the prospect of a deal at about 50-50, but that seems pessimistic, he said. It looks like a deal could pass investors at about $14.50 per share, or about $25 billion, he noted.

With roughly $11 billion in cash, which more than balances out the company's debt, such a deal could be accomplished -- given Michael Dell's 15% stake rolling over -- with about $5 billion in equity from sponsors and $15 billion in debt.

Dell floated its interest in bidding on Quest Software through the media last year in a calculated manner, an arb said. Dell eventually acquired the target for $2.4 billion in July. This situation reminds investors of the run-up to the Quest deal and could point to some comfort that a buyout is meaningfully in process, the arb said. But the buyout shops apparently are not the sources of the leaks, which raises some question about why the talks have been made public, he added.

One arb suggested that Dell may be close to a deal or to entering exclusive talks and want to make a soft market check before moving forward.

Investors sense that something is afoot and Michael Dell has made it clear that he is interested in a buyout, an arb said. A deal could come in at $15 per share, based on comparable premiums and the leveraged buyout math, the arb said.

Dell shares traded Tuesday for $13.18 at a spread of $1.32 to a $14.50 deal, the lower end of what arbs seem to expect. That spread, assuming that deal price, suggests the market is putting about a 70% probability of a deal getting done, figuring the downside on Dell is $10.25 per share.

The recent departure of Dell's M&A head, David Johnson, for Blackstone Group LP offers an odd twist to the buyout scenario, and possibly adds to the likelihood of a deal getting done in as far as it suggests a change in direction at the company.

Dell, Silver Lake and TPG declined to comment.

Tags: Bank of America Merrill Lynch | Barclays plc | Blackstone Group LP | Credit Suisse Group | David Johnson | Dell Inc. | Michael Dell | Quest Software | RBC Capital Markets | Silver Lake | TPG Capital

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Scott Stuart

Senior Writer: Arbitrage

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