News Analysis: Does the Dell deal smack of déjà vu?

Silver Lake set a new post-crisis benchmark with its audacious $24.4 billion offer for PC manufacturer
Dell last month. But does the deal presage a return to the highly-levered excesses of the pre-Lehman buyout bubble?

“Oh my God, it’s 2006 all over again.” That was the reaction of one Private Debt Investor colleague to the news of Silver Lake’s audacious bid for PC manufacturer Dell last month. And while it’s too early to call the return of the so-called mega-buyout, the numbers involved – particularly on the debt side – are redolent of the heady days of the private equity’s ‘golden era’ where debt was cheap, plentiful, and de rigeur.  

Silver Lake’s $13.65 per share offer, worth $24.4 billion in total, would be the biggest take-private by a private equity firm in the post-Lehman era if it completes.

Silver Lake doesn’t wont for firepower – it’s still raising its latest buyout vehicle, which has already gone past the $7 billion mark on the way to its $7.5 billion target. But it’s no buyout behemoth in the Blackstone or KKR mould, and the key to this deal is a hefty debt package, including a sizeable $2 billion cheque from an unlikely source.

First, the traditional lenders: BofA Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets have provided debt financing to support the buyout, Dell said. That includes $4 billion in ‘B’ term loans, $1.5 billion of ‘C’ term loans and a bridge of about $3.25 billion. The latter could well be refinanced via the European high yield bond market, sources suggest. Existing debt is being rolled over, Dell’s spokesman added.

But a key component to the deal is a $2 billion loan from technology giant Microsoft, reportedly in the form of a mezzanine tranche or other convertible loan instrument. Such a loan would rank amongst the largest mezzanine deals ever, sources suggested.

“The US debt markets are extremely liquid at the moment, sufficient to make a deal like this possible,” commented a senior North American banker interviewed by Private Debt Investor.

Interest rates in the US have also made senior bank debt highly attractive, while Dell’s sizeable cash surplus allows it to support a significant debt burden with relative comfort.

“Across the marketplace, you’re seeing increased availability of leverage,” another industry source said. “That’s driven by the cost of leverage and a search for yield across the capital structure.”

The buoyant US CLO market means there’s no shortage of appetite for leveraged loans, suggesting the banking quartet should be able to syndicate the debt package with relative ease.

The last piece of the capital structure jigsaw is about $4.5 billion in equity from company founder Michael Dell. So this is no Barbarians at the Gate scenario – it’s very much a consensual process, although an upwelling of shareholder opposition to the buyout could yet complicate matters.

Buyout industry sources were quick to question whether the deal would herald a return to so-called mega-buyouts however. “The size of the deal is not a trend. It’s very specific to this deal,” one senior US private equity figure remarked. “You have an owner with a massive amount of money he can roll over, and there’s the Microsoft connection, so that’s the opportunity.”

“The credit markets have been very accommodating for some time and there was already a general perception that you could do a very large deal at frankly quite attractive average rates in the credit markets,” said Blackstone Group president Tony James during an earnings call last month. “Dell doesn’t really move that needle because they have a lot of investment grade debt that’s assumable. You can certainly do a deal well above $10 billion in the credit markets if it made economic sense to the equity.”

News of a $28 billion joint bid by Warren Buffett’s Berkshire Hathaway and 3G Capital for New York-listed H.J. Heinz, and a mooted €3.5 billion secondary buyout of French catering company Elior as we went to press suggests that others apparently agree.