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Dell LBO Idea Might Not Be Feasible, Debt Analyst Cautions

This article is more than 10 years old.

The discussion around Dell's potential LBO boils down to this: the stock is cheap, and there's enough cash flow to service what would be a massive debt load, but the price tag might simply be too high to pull off given the number of participants a deal of this size would likely require, and the additional Dell is going to need to continue the transformation of the company away from PCs.

Gimme Credit analyst Dave Novosel weighed in on the situation this morning, and the bond market seer nicely captures the issues here. He notes that the stock is down 30%-plus over the last 12 months; that it has a hoard of overseas cash; and it has very modest leverage, "typical characteristics of an LBO candidate." The fact that founder Michael Dell already owns a 16% stake in the company makes a potential deal a little easier. And he notes that taking the company private would allow the company to revamp the company outside of the glare of the public markets.

But he nonetheless sees real issues here.

For one thing, taking Dell private would not improve its competitive position against the likes of Apple, Samsung and IBM. It still isn't really a player in two primary tech growth markets, tablets and smartphones. More relevantly, Novosel notes that LBOs in the tech sector do not have a good track record - he points to First Data and Freescale as companies that were taken private and had less attractive economics than investors had anticipated. He also touches something that the equity markets analysts I cited in a post yesterday noted: Dell is going to need free cash to continue the ongoing shift of its business toward enterprise IT and away from PCs. That will make it tougher to bring down the considerable debt burden that an LBO would require.

To do the deal, Novosel figures, would require the buyers to come up with $15 billion or so in debt, and he suspects the company would likely have to pay an "exorbitant" rate given the risks involved.

His conclusion: an LBO is "certainly possible, but not likely."

Dell is down 57 cents, or 4.3%, to $12.60.