The increased proposal of $13.75 per share for Dell Inc. from Michael Dell and
Silver Lake would be accommodated at the current ratings guidance range of 'B+'
to 'BB-', Fitch Ratings says.
The higher price would have minimal impact on leverage.
A rumored increase to $14 per share would also be unlikely to impact the ratings guidance range of 'B+' to 'BB-'. However, this price would make the possibility of achieving a 'BB-' much more remote. Given our expectations for weak results in the upcoming reporting quarter, Fitch expects pro forma leverage to increase to or above 4.5 times (x) under both scenarios.
Should the deal fall through, current proposals from Carl Icahn and affiliates contemplate gross leverage in the 3.5x to 4.0x range. They also expect to use a large portion of Dell's cash balances. Fitch has always been concerned about this prospect given Dell's large negative working capital balances and the potential need for future M&A. We would expect an ultimate rating in the 'B+' to 'BB-' range under an Icahn (or similar) recapitalization proposal, subject to ultimate details and no change to long-term business strategy.
Fitch believes it is highly unlikely that the deal will fall through with no subsequent recapitalization. Fitch moved Dell out of investment grade when the going-private transaction was first proposed. Under the scenario of no LBO and no recapitalization, ratings would remain out of investment grade at 'BB+'. This reflects skepticism that the balance sheet would remain conservative as well as the risks that fixed-income investors would assume should management once again change course.
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