Silver Lake seals biggest post-Lehman buyout

Microsoft has provided one of the biggest ever mezzanine loans to fund US buyout group Silver Lake’s record-breaking $24bn buyout of Dell.

In a deal which will call to mind the heady days of the pre-Lehman buyout bubble, technology-focused buyout firm Silver Lake has set a new post-crisis benchmark with an audacious $24.4 billion take-private of PC manufacturer Dell.

The firm’s $13.65 per share offer for New York-listed Dell represents a premium of 25 percent to the company’s closing share price of $10.88 on 11 January this year, the last trading day before buyout rumours began to circulate, Dell said in a statement. The company’s board of directors has unanimously approved the offer. Dell's shares were trading at $13.39 around midday Tuesday.

Underpinning the deal is a debt financing package reminiscent of the buyout industry’s golden era. BofA Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets have provided debt financing to support the buyout, Dell said. The overall debt package is believed to be in the region of $15 billion, according to reports. Existing debt has been rolled over into the new company, the statement added.

Technology giant Microsoft is also committing capital to the deal via a $2 billion loan, 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 PEI’s sister publication, 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. If the Fed is lending at 25bps, and your institutions are lending at three, you can go from there.”

Michael Dell, the company’s founder, owns 14 percent of the company’s stock. He will remain chairman and chief executive of the business following the buyout, and will maintain a “significant equity investment” by contributing his shares to the new company as well as making “a substantial additional cash investment”, via his investment vehicle MSD Capital, the company said.

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.”

Last week, The Blackstone Group president Tony James said the deal would not signal the start of any kind of mega-deal trend because large buyouts have already been possible.

“The credit markets have been very accomodating 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,” he said during an earnings call. “Dell doesn't really move that needle because they have a lot of investment grade debt that's assumable. I would say people are already perceiving you can certainly do a deal well above $10 billion in the credit markets if it made economic sense to the equity.”

The deal is subject to regulatory approvals, but is expected to close by the end of the second quarter of Dell's 2014 financial year.

A 45 day “go-shop” period has begun, during which Dell’s special committee will solicit alternative bids for the company. The deal with Dell features a sizeable $180 million termination fee payable to Silver Lake in the event the company approves a rival bid. For a competing bidder who did not qualify during the initial go-shop period, the termination fee would rise to $450 million.

JPMorgan and Evercore Partners are advising the Dell board, together with Debevoise & Plimtpon. Goldman Sachs and Hogan Lovells are advising Dell. BofA Merrill Lynch, Barclays, Credit Suisse and RBC are advising Silver Lake, with Simpson Thacher & Bartlett providing legal advice.