Not So Fast, Dell

 | Feb 11, 2013 | 3:30 PM EST
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Just when it looked like Dell (DELL) was going to leave Mr. Market's arena at $13.65 a share, one of the most respected value investors in the land has said, "Not so fast." Southeastern Asset Management, owner of 8.5% of Dell's outstanding stock, has come out publicly and vehemently opposed any deal at or near the current takeout price. In a letter to Dell's board of directors, a copy of which was filed with the Securities and Exchange Commission, Southeastern did not mince words:  "We are writing to express our extreme disappointment regarding the go-private transaction, which we believe grossly undervalues the Company."

I think Southeastern makes a solid argument with respect to Dell's valuation: If you account for Dell's pristine balance sheet, free-cash-flow generation and future growth in its enterprise software division, it's no wonder everyone lined up so quickly to make this deal happen. When I first took a closer look at Dell and made my attempt at valuing the business, I got to a value of $17 to $20 a share. Southeastern believes that $24 a share is a more appropriate fair value.

Southeastern's position is straightforward: If Dell sold its business piecemeal, the sum of the parts would fetch $24 a share. In addition, Southeastern pointed out various other actions Dell could take that it believes would be more value-creating for shareholders, among them a one-time dividend and a more shareholder-friendly buyout.

Sources estimate that Southeastern has a cost basis of around $24 per Dell share. Interestingly, many other large investors are believed to have a cost basis that's significantly higher than the buyout price. According to The Wall Street Journal, market-data firm Ipreo believes T. Rowe Price paid nearly $17 a share for its Dell stake.

What I do know is that Dell is one of Southeastern's largest investments -- and if the cost basis is accurate, the buyout would serve it a painful loss. The firm is resolute: "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 other available Delaware statutory appraisal rights."

Regardless of whether Southeastern is accurate in its $24 sum-of-the-parts Dell valuation, the wide gap between that appraisal and the buyout price indicates that Dell isn't a done deal by a long shot. Southeastern has far too much capital at stake to walk away, and they won't, as their letter indicated.

On the other hand, it's highly unlikely that this particular buyout group -- or anyone, for that matter -- will up the price to $24 a share. Unless Dell wants to spend time and money fighting a legal battle, I suspect it will have to come back with a superior offer, or allow a potential sale of Dell's various pieces first before accepting $13.65 a share. Founder and CEO Michael Dell, the only shareholder with a stake larger than that of Southeastern, won't vote on the proposed buyout.   

Last week, I sold off our January 2015 $7 Dell call options at very modest discount to the buyout price. I do think Southeastern has a very legitimate claim that could prove fruitful, but there is no telling how long such a saga will play out. That said, if Dell shares slip even a little from the buyout price, I'll probably be looking to place another bet.



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