More Reasonable to Believe Dell (DELL) Will Not Go Private - Analyst
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Rating Summary:
22 Buy, 14 Hold, 1 Sell
Rating Trend:
Up
Today's Overall Ratings:
Up: 17 | Down: 14 | New: 17
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BMO Capital's Keith Bachman commented on news Dell (Nasdaq: DELL) is in talks to go private.
Looking at it on a strategic level, the firm notes Dell's single biggest challenge is to change the nature of its income statement - to dilute, or lower, the contribution from client revenues (desktop and notebook PCs). "We think the PC market will experience ongoing unit and revenue pressure," the analyst said. "We note that Dell still generates about 48% of revenues from clients."
"Therefore, we believe that Dell will want to continue to buy non-client IP, such as software. If Dell does go private, it will add material leverage to its balance sheet, which we think will limit Dell's ability to buy assets and diversify its revenue stream."
While a LBO is possible, the analyst said it is more reasonable to assume that the company wants to maintain financial flexibility to buy more assets and therefore will stay public.
"By our rough math, if Dell were to go private at $17/share, and Michael Dell were to roll his equity into the deal, then Dell would need to raise about $20 billion in financing. If we assume this financing is all debt, then the total debt would be about 6.3x our projected FCF in FY2014. Hence, from a strategic level, while we think Dell's balance sheet and FCF could support an LBO, we believe it is reasonable to assume that Dell will want to maintain financial flexibility to buy more assets, and not go private."
Bachman maintained a Market Perform rating on Dell.
Looking at it on a strategic level, the firm notes Dell's single biggest challenge is to change the nature of its income statement - to dilute, or lower, the contribution from client revenues (desktop and notebook PCs). "We think the PC market will experience ongoing unit and revenue pressure," the analyst said. "We note that Dell still generates about 48% of revenues from clients."
"Therefore, we believe that Dell will want to continue to buy non-client IP, such as software. If Dell does go private, it will add material leverage to its balance sheet, which we think will limit Dell's ability to buy assets and diversify its revenue stream."
While a LBO is possible, the analyst said it is more reasonable to assume that the company wants to maintain financial flexibility to buy more assets and therefore will stay public.
"By our rough math, if Dell were to go private at $17/share, and Michael Dell were to roll his equity into the deal, then Dell would need to raise about $20 billion in financing. If we assume this financing is all debt, then the total debt would be about 6.3x our projected FCF in FY2014. Hence, from a strategic level, while we think Dell's balance sheet and FCF could support an LBO, we believe it is reasonable to assume that Dell will want to maintain financial flexibility to buy more assets, and not go private."
Bachman maintained a Market Perform rating on Dell.
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