Activist investor Carl Icahn has come out against Dell Technologies Inc’s plan to return to public markets, arguing that the proposed transaction undervalues shares that track its stake in VMware.
The billionaire said he would solicit votes against the deal and potentially propose an alternative transaction allowing investors to cash out if they want. Icahn also disclosed on Monday in a letter to shareholders that he had increased his stake in the tracking stock known as DVMT to 8.3% from 1.2%, making him its second-largest holder.
“I intend to do everything in my power to stop this proposed DVMT merger,” Icahn wrote in the letter. “It is better to have peace than war, but be assured, I still enjoy a good fight for the right reasons, and in the current situation, I do not see peace arriving quickly.”
A representative for Dell declined to comment.
At issue is Dell’s $21.7bn-proposal to buy out DVMT holders before listing its own shares on the New York Stock Exchange. The move, which is backed by private equity firm Silver Lake Partners, is designed to help Michael Dell streamline his tech empire, which includes Dell, the tracking stock and a majority stake in VMware.
Some investors have balked at the proposed DVMT buyout, questioning how Dell arrived at a valuation of its own shares. The offer of $109 a share in cash and Dell stock values Dell’s new Class C shares at $79.77 – a number that has more than doubled during the company’s internal calculations in the months before the deal.
Icahn urged DVMT holders not to accept Dell’s offer, or a new bid, unless it includes a “very, very substantial increase.” The activist said he’s evaluating alternative transactions with financing sources, as he recognises some investors holders might want to cash out.
“If Dell does raise the offer, it will be important to provide liquidity to the DVMT stockholders that want to sell, while also protecting the DVMT stockholders that do not want to sell from being forced out in a merger,” he said. “The best way to balance these competing interests would be to offer a competing partial bid that provides partial liquidity without forcing a merger.”
It wouldn’t be the first time Icahn has quarrelled with Michael Dell. In 2013, Icahn launched an unsuccessful bid to prevent Dell and Silver Lake from taking Dell private in a $24.4bn transaction Icahn argued at the time was too low. Icahn conceded defeat in that fight, but not before the price of the transaction was increased.
In his letter Monday, Icahn said he believes Dell and Silver Lake are low-balling DVMT investors and that on a “pure mathematical” basis the tracking stock is worth $144 apiece. Icahn said he believes the current offer values it at closer to $94 apiece, based on his own valuation of Dell shares and the trading multiples of other companies in the sector.
He said that when Dell created the tracking stock as part of the take-private transaction, its advisers assumed the tracking stock would trade at five to 10% discount to VMware shares. Icahn noted Dell and Silver Lake are now trying to buy the tracking stock at a 36% discount.
“This plan significantly benefits Michael Dell and Silver Lake, but at a huge cost to the DVMT stockholders,” Icahn said, adding that the windfall would total about $11bn.
Dell has also floated the idea of an IPO as a contingency if shareholders vote against the proposed transaction. Icahn said talk of the listing was an “empty” threat, adding that he believes it wouldn’t stand up to a challenge in Delaware courts because it would cause irreparable harm to DVMT holders and lacks the necessary safeguards to protect minority investors.
Icahn argued that DVMT holders might be better served if the deal were to collapse. Buying the tracker stock is an imperative for Dell because – without the VMware operations – it’s a “mundane highly levered hardware company” that’s likely to stagnate or decline over time, according to the activist billionaire.
Meanwhile, VMware will likely see accelerating growth and expanding margins, which could generate more than $12 per share of free cash flow in a few years and a stock price of more than $250 for the DVMT tracker, Icahn said.
“As astute technology investors, we believe that Michael Dell and Silver Lake perceive that VMware is right at the beginning of a multi-year inflection point,” he said. “Clearly Michael Dell and Silver Lake take us for fools if they think that we would exchange this future value potential.”
Icahn isn’t the only activist investor holding DVMT stock. Elliott Management Corp, the New York hedge fund run by billionaire Paul Singer, also owns a 4.3% stake in the company. Elliott hasn’t disclosed whether it would support the transaction.
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