|[January 17, 2013]
Fitch: Dell LBO would Exacerbate Existing Challenges
NEW YORK --(Business Wire)--
Fitch's 2013 technology outlook released last week stated that
speculation around a Dell (News - Alert) leveraged buyout (LBO) would re-surface in
2013 but would unlikely be consummated for several reasons. Since our
outlook, press reports indicate that a deal may well be on its way. We
believe that should an LBO occur, and keeping in mind that there are a
number of different financing scenarios, an issuer default rating in the
single -'B' category would be likely.
Depending on the structuring, we believe gross leverage could be between
3.5 times (x) to and 4.5x assuming repatriation of a large portion of
Dell's international cash. Leverage could be approximately 1.0x higher
should the company seek to raise debt secured by portions of the
international cash (as some media outlets have speculated).
We would expect the basis for any going-private transaction would
revolve around transforming the company into a smaller, higher margin
business over the next three-to-five years that would command a higher
enterprise value multiple upon exit than its currently being awarded
value in the public equity market.
Dell, led by David Johnson (the recently departed head of corporate
strategy), has done a solid job of building a portfolio of higher margin
end-to-end enterprise solutions of security, networking, storage, and IT
management tools. Despite these higher- margin businesses, execution to
date has been relatively nascent relative to the company's overall size.
High leverage would greatly limit the company's flexibility to address
challenges in the highly competitive and evolving technology industry.
Dell will continue to face formidable competitors, such as EMC, IBM,
Cisco, Oracle, Accenture (News - Alert), HP, and thers, all of which will have far
greater financial flexibility, should an LBO be completed.
Dell's ability to repatriate its significant offshore cash is a critical
determinant in the LBO decision, as it greatly influences the expected
rate of return on the transaction and the vast majority of Dell's cash
is held offshore. In addition, we have historically stated that a
portion of Dell's cash balance is directly tied to the company's
negative working capital balance, which results in significant cash
usage when revenues declines. Therefore, we believe Dell needs to
maintain an adequate cash cushion to offset this liquidity risk,
particularly given the weak macro environment and continued poor
performance of the company's PC business.
Dell has spent the last several years expanding its financing business
beyond the core U.S. market into Canada and Europe. We would require
additional clarity around the company's long-term plans in this area, as
it would be impossible to finance this business at the corporate level
with a sub-investment investment-grade rating without third-party help.
The inability to offer financing would place the company at competitive
We fully expect existing unsecured bonds to be subordinated by any
potential LBO transaction. The bonds do not contain change of control
covenants and the limitation on liens covenant is generally weak for
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
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