Carl Icahn Jumps Into Dell; Proposes Changes at Transocean ~ market folly

Thursday, March 7, 2013

Carl Icahn Jumps Into Dell; Proposes Changes at Transocean

David Faber over at CNBC reports that according to "trading sources," Carl Icahn has taken around a 6% stake in Dell (DELL).  Additionally, according to recent SEC filings, he's proposing some changes at Transocean (RIG) as well.

Icahn Jumps into Dell

Dell of course has an offer on the table to go private from founder Michael Dell and private equity firm Silver Lake that has seen opposition from some of its largest shareholders, including Southeastern Asset Management.

Icahn is reportedly expected to oppose the deal and has apparently built up a stake close to 100 million shares.   It seems that he favors a leveraged recapitalization.

Here's the letter Icahn sent to the special committee of Dell's board:

"We are substantial holders of Dell Inc. shares. Having reviewed the Going Private Transaction, we believe that it is not in the best interests of Dell shareholders and substantially undervalues the company. 

Rather than engage in the Going Private Transaction, we propose that Dell announce that in the event that the Going Private Transaction is voted down by shareholders, Dell will immediately declare and pay a special dividend of $9 per share comprised of proceeds from the following sources: (1) $4.26 per share, or $7.4 Billion, from available cash as proposed in the Going Private Transaction, (2) $1.73 per share, or $3 Billion, from factoring existing commercial and consumer receivables as proposed in the Going Private Transaction, and (3) $4.26, or $5.25 Billion in new debt. 

We believe that such a transaction is superior to the Going Private Transaction because we value the pro forma “stub” at $13.81 per share using a discounted cash flow valuation methodology based on a consensus of analyst forecasts. The “stub” value of $13.81 combined with our proposed $9.00 special dividend gives Dell shareholders a total value of $22.81 per share, representing a 67% premium to the $13.65 per share price proposed in the Going Private Transaction. We have spent a great deal of time and effort in determining the $22.81 per share value and would be pleased to meet with you to share our analysis and to understand why you disagree, if you do. 

We hope that this Board will agree to adopt our proposal by publicly announcing that the Board is committed to implement our proposal if the Going Private Transaction is voted down by Dell shareholders. This would avoid a proxy fight. 

However, if this Board will not promise to implement our proposal in the event that the Dell shareholders vote down the Going Private Transaction, then we request that the Board announce that it will combine the vote on the Going Private Transaction with an annual meeting to elect a new board of directors. We then intend to run a slate of directors that, if elected, will implement our proposal for a leveraged recapitalization and $9 per share dividend at Dell, as set forth above. In that way shareholders will have a real choice between the Going Private Transaction and our proposal. To assure shareholders of the availability of sufficient funds for the prompt payment of the dividend, if our slate of directors is elected, Icahn Enterprises would provide a $2 billion bridge loan and I would personally provide a $3.25 billion bridge loan to Dell, each on commercially reasonable terms, if that bridge financing is necessary. 

Like the “go shop” period provided in the Going Private Transaction, your fiduciary duties as directors require you to call the annual meeting as contemplated above in order to provide shareholders with a true alternative to the Going Private Transaction. As you know, last year’s annual meeting was held on July 13, 2012 (and indeed for the past 20 years Dell’s annual meetings have been held in this time frame) and so it would be appropriate to hold the 2013 annual meeting together with the meeting for the Going Private Transaction, which you have disclosed will be held in June or early July. 

If you fail to agree promptly to combine the vote on the Going Private Transaction with the vote on the annual meeting, we anticipate years of litigation will follow challenging the transaction and the actions of those directors that participated in it. The Going Private Transaction is a related party transaction with the largest shareholder of the company and advantaging existing management as well, and as such it will be subject to intense judicial review and potential challenges by shareholders and strike suitors. But you have the opportunity to avoid this situation by following the fair and reasonable path set forth in this letter. 

Our proposal provides Dell shareholders with substantial cash of $9 per share and the ability to continue as owners of Dell, a stock that we expect to be worth approximately $13.81 per share following the dividend. We believe, as apparently does Michael Dell and his partner Silver Lake, that the future of Dell is bright. We see no reason that the future value of Dell should not accrue to ALL the existing Dell shareholders – not just Michael Dell.  As mentioned in today’s phone call, we look forward to hearing from you tomorrow to discuss this matter without the need for us to bring this to the public arena.  Very truly yours, Icahn Enterprises L.P.  By: Carl C. Icahn Chairman of the Board"

Icahn Proposes Dividend & New Directors at Transocean

Icahn also has revealed a stake in Transocean (RIG) earlier this year with 20,154,035 shares back on January 29th.  He just recently filed an amended 13D with the SEC to show that he will propose a $4 dividend per share to be paid in 4 equal installments, to elect 3 new directors, and to propose a repeal of the company's staggered board.

Icahn writes,

"I am proposing the $4 dividend because I believe that a high dividend payout ratio is the only way that Transocean will consistently employ a disciplined and sensible approach to capital allocation. Over the past several years, in my opinion, the Company has conducted ill-advised mergers, employed unsuccessful development strategies and squandered the substantial cash flow generated by the business. Now, it appears to me, the Board and management would like to take the Company’s substantial cash flow and use it to achieve three goals: the massive repayment of the company’s low coupon debt, the aggressive new build growth locked up with low return contracts, and the payment of a meager dividend to shareholders. 

I believe that the inability of Transocean to grow and pay down debt is a function of poor capital allocation which has driven the share price to below net asset value. Once the capital allocation problem has been solved, in my opinion, Transocean will have access to yield hungry investors to finance growth and acquisitions on attractive terms. 

I believe that to permanently repair the failed capital allocation strategy, shareholders of this Company must replace the directors who have been the architects of this failed strategy, including the Chairman. The directors that I have chosen have substantial experience in the creation and issuance of non-traditional yield structures, driving shareholder returns through capital allocation, and managing and growing large corporations both internationally and in the energy sector.  If these nominees are elected, which I expect they will be, I truly believe it will serve shareholders well."

Corporate raider and general rabblerouser Carl Icahn is absolutely everywhere these days.  It's almost as if he sees a situation escalating and jumps in to take it up a notch.  He's submitting SEC filings practically every few days (not an exaggeration).

He's jumped into Herbalife (HLF) and is a long versus Bill Ackman's HLF short, Icahn's proposing changes at Transocean (RIG), and now he's jumped into the Dell (DELL) ring as well.  We'll have to wait and see what his next target will be.

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