Private equity house emerges as frontrunner in Dell buyout

A potential bid by private equity firm Silver Lake and its partners to take Dell private is unlikely to be bettered, sources claim.

Silver Lake has a major advantage in having secured the backing of founder and CEO Michael Dell, who holds around a 16 per cent stake in the firm and would participate in the buyout consortium.

If Silver Lake clinches a deal with Round Rock, Texas-based Dell, this will result in a so-called "go-shop" period in which the company can actively seek offers from other potential buyers to ensure it has attracted the best possible offer.

In the absence of shareholder activism, we suspect the deal would be transacted at $14-$14.50 per share.

But senior executives at the largest private equity firms competing with Silver Lake, speaking on condition of anonymity, told Reuters that they were unlikely to top Silver Lake's offer.

"I just don't think it is doable to break up the current consortium. When management is rolling over (their stake) and they have picked a partner, it is hard to top the agreed offer," one of the private equity executives said. The executives also cited the lack of an exit strategy and sheer size of the deal.

A deal is imminent with Silver Lake and its partners, which include Microsoft and Canada Pension Plan Investment Board, although the parties have yet to agree on a final price, two people close to the matter said.

Microsoft declined to comment while the pension plan did not immediately respond to a request for comment.

Microsoft's investment would come in the form of preferred equity that would later help pay down Dell's high-yield debt incurred as part of the leverage buyout, one of the people said.

Dell has formed a special committee of its independent directors and hired Evercore Partners to assess whether the company is getting the best deal for shareholders and not one that is just in the best interest of Michael Dell, according to several people familiar with the matter.

Dell, Silver Lake and Evercore declined to comment.

Dell shares ended trading at $13 on Thursday, giving it a market value of about $22.6 billion.

"In the absence of (shareholder) activism, we suspect that the deal would likely be transacted at around $14-$14.50 per share," Bernstein analysts said in a statement.

"We see other financial buyers as unlikely, particularly if Michael Dell and the management team have a 'standstill' agreement with financial sponsors," they added.

Dell only reached out to a limited number of private equity firms to discuss the idea of going private and entered into exclusive talks with Silver Lake late last year, according to one of the people familiar with the matter.

Michael Dell is expected to roll over his stake in the company he founded with just $1,000 in 1984 as part of the deal. Even if other private equity firms were willing to outbid Silver Lake, they would also need Michael Dell to agree to roll over his stake, the people said.

To ensure a level playing field, the special committee would have to recommend that the company's founder goes along with any superior proposal, the people added.