UPDATE 5-Icahn, Southeastern mount challenge to Dell buyout

Fri May 10, 2013 4:40pm EDT

* Icahn proposal "superior", some shareholders say

* Offers choice, stirs discussion, they say

* Some hope Michael Dell, Silver Lake will counter-offer

By Sam Forgione and Ross Kerber

NEW YORK/BOSTON, May 10 (Reuters) - Carl Icahn and Southeastern Asset Management Inc have mounted an aggressive challenge to Michael Dell's controversial $24.4 billion offer to take Dell Inc private, offering $21 billion in cash to shareholders while vying to wrest control of the company from its co-founder.

Michael Dell, major shareholders such as Southeastern and billionaire activist investor Icahn are waging a battle over the future of the world's third largest personal computer maker, once a tech-industry high flyer, but now struggling to evolve as people embrace smartphones and tablet computers.

Michael Dell and private equity firm Silver Lake want to take the company private for $13.65 per share, making it the largest buyout since the 2008 financial crisis. But many shareholders, including Southeastern and T. Rowe Price, complain that offer severely undervalues the company.

Instead, Icahn and Southeastern, two of Dell's biggest shareholders, proposed a deal that gives shareholders $12 of cash for every share they own, as well as allow them to keep their stock. Given that they retain their stake in the company and that the rival offer is for $13.65 a share, every stock owned takes on a value of $1.65, Icahn and Southeastern argue. ()

At $12 apiece, the cash portion of Icahn's and Southeastern' s offer will come to $21 billion.

Should Dell's board rebuff them and put the go-private offer to a shareholder vote, the pair will nominate a slate of 12 directors to challenge the current board. In an interview with CNBC on Friday, the activist investor said Michael Dell will no longer run the company should his slate of candidates be elected.

The initial reaction from shareholders was favorable, though some investors hoped the latest offer would prompt Michael Dell to offer a counter. David Moon, Chairman of Moon Capital Management in Knoxville, Tennessee, said his firm sold its Dell shares weeks ago and warned that failure to secure any sort of deal might send Dell's shares back to $10 a share, before Michael Dell's takeover offer.

Mario Gabelli, chief executive of Gamco Investors Inc, said via e-mail he would vote in favor of the latest proposal. On Twitter, he wrote it was a "good alternative" to a leveraged buy-out. Gabelli investment funds own about 5.2 million Dell shares, latest filings show.

"It's improvement. It gives people a choice. The other (proposal) comes across like a ramrod," said Donald Yacktman, founder and CEO of Yacktman Asset Management which holds 14.8 million shares, according to Thomson Reuters data. "Whichever way things evolve, what this is doing is forcing better capital allocation than we have seen in the last five years."

On Friday, Icahn again suggested Michael Dell would be the biggest beneficiary of his own proposed buyout, which would exclude current shareholders from participating in the fruits of his restructuring effort.

Icahn's offer "gives us the opportunity to continue our participation in Dell's operating business and thus we believe it to be superior," said Tim Piechowski, associate portfolio manager, Alpine Capital Research, St Louis, Missouri, which owned 2.5 million shares as of May 10.

Dell shares were up 0.7 percent at $13.42 in late trade.

VISION

Icahn argued in a letter sent to Dell's board and made public in a filing on Friday that Dell operates a large enterprise-focused computing business in addition to its ailing PC division, with strong ties Microsoft Corp and Intel Corp. Without specifying details, he also said cost savings could be had from merging assembly plants across the world, while there remained opportunities to spin off non-core businesses.

That echoed Michael Dell's own strategic vision for a company he hopes to transform from a purveyor of low-margin PCs into a global provider of high-margin services for enterprises.

As for Southeastern, past filings show the fund management firm run by Mason Hawkins bought into Dell's shares at about $16.88, meaning a huge loss were they to accept a buyout.

Icahn told Reuters on Friday he will personally contribute a couple of billion dollars to finance a $5.2 billion bridge loan needed to effect his deal. He added that he had already reached out to several investment bankers. Later, he told CNBC in a TV interview that one of those investment banks included Jefferies, which would contribute $1.6 billion to the loan.

Jefferies & Co declined to comment.

The Icahn and Southeastern challenge comes after Blackstone LP ended its pursuit of Dell in April, and pulled out a month after it teamed up with Icahn to challenge the take-private attempt.

It was "insulting to shareholders' intelligence for the board to tell them that this board only has the best interests of shareholders at heart," Icahn and Southeastern said in the letter. "We are often cynical about corporate boards, but this Board has brought that cynicism to new heights."

Dell said in a statement on Friday that its special committee is reviewing the Southeastern Asset materials and will provide comment in "due course." A representative for Silver Lake declined to comment.

"I don't think Icahn and Southeastern have enough sway over the shareholders," Raymond James analyst Brian Alexander said. "As Dell has a lot of cash, (the latest deal) is basically like a leveraged private equity deal, without the company going private."

Both Icahn and Southeastern said they would take shares rather than cash. They would finance the proposal from existing cash and about $5.2 billion in new debt.

Icahn and Southeastern together hold about 13 percent of Dell stock. The billionaire investor previously proposed paying $15 per share for 58 percent of Dell.

"As a shareholder, what I'm most pleased about is that the pot continues to be stirred," said Robert Willis, president and CEO of Willis Investment Counsel in Gainesville, Georgia, which owns about 350,000 shares of Dell. "I like the fact that those who oppose this aren't going to lie down."

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