Moody's Places Dell's Ratings Under Review Following Move to Acquire EMC (EMC)
Moody's Investors Service ("Moody's") has placed all ratings of Dell Inc. ("Dell") and Dell International (a debt issuing subsidiary of Dell Inc.), including the corporate family rating ("CFR") of Ba2, under review for upgrade following Dell's announcement that it signed a definitive agreement to acquire EMC Corporation for $24.05 per share in cash in addition to tracking stock linked to a portion of EMC's economic interest in the VMware, Inc. for a total transaction value of about $67 billion.
Dell plans to finance the cash portion of the transaction price through a combination of new common equity, new debt financing and cash on hand. There are no financing conditions to closing the transaction. Michael Dell and related stockholders are expected to own approximately 70 percent of the company's common equity, excluding the tracking stock. The transaction is subject to customary conditions, including receipt of required regulatory and EMC stockholder approvals. Moody's expects to conclude the review upon the close of the transaction, which is expected to occur in the months of May to October 2016.
RATINGS RATIONALE
The rating review reflects Moody's view that despite the significant increase in debt and initial leverage, Dell's overall credit profile will be enhanced with the acquisition of EMC, a merger that will create the largest private technology company in the world based on revenues. Upon the completion of the EMC merger, Dell will have a leading global market position in personal computers (the #3 market share), servers (#2), and data storage (#1 with market share about double that of the next competitor).
Moody's believes that Dell and EMC's combined product portfolio of client, data center, and storage solutions (which includes VMware, EMC's 78% owned software virtualization subsidiary), will position Dell to compete effectively in a technology environment shifting to hybrid cloud computing platforms. Dell's profits and cash flow should benefit from the increasing demand for computing capacity and storage requirements to support growing digital solutions such as mobility, social networking, multi-channel sales and marketing, and data analytics.
A key driver for the review for upgrade is Michael Dell's commitment to rapidly de-lever, which will be supported by Moody's projected free cash flow of over $5.5 billion in calendar year 2017. Similar to what transpired after the leveraged buyout of Dell in 2013, Moody's believes that the company will allocate a majority of its cash flow to debt repayment. Accordingly, Moody's expects that adjusted debt to EBITDA will decrease to below 4x by the end of calendar year 2017.
Moody's review will focus on Dell's ability to integrate EMC and execute its enterprise centric business strategy. The review will also consider the potential impact this acquisition could have on customers, suppliers, and employees. In addition, Moody's will also assess the new capital structure (e.g., the mix of secured versus unsecured debt and the rights of the tracking stock holders) and the combined liquidity profile, including the timing and magnitude of any asset sales, cost reduction plans, and post deal synergies. Moody's expects that any upgrade of Dell's CFR would likely be limited to one notch upon the close of the transaction.
Rating Actions:
Ratings On Review for Upgrade (LGD assessments subject to change):
..Issuer: Dell Inc.
.... Corporate Family Rating, Ba2, Placed on Review for Upgrade
.... Probability of Default Rating, Ba2-PD, Placed on Review for Upgrade
....Senior Unsecured Regular Bond/Debenture (Local Currency), Ba3, LGD5, Placed on Review for Upgrade
Outlook Actions:
..Issuer: Dell Inc.
....Outlook, Changed To Rating Under Review From Stable
..Issuer: Dell International LLC
....Senior Secured Bank Credit Facility (Foreign Currency), Ba1, LGD2, Placed on Review for Upgrade
....Senior Secured Bank Credit Facility (Local Currency), Ba1, LGD2, Placed on Review for Upgrade
....Senior Secured Regular Bond/Debenture (Local Currency) due 2020, Ba1, LGD2, Placed on Review for Upgrade
Outlook Actions:
..Issuer: Dell International LLC
....Outlook, Changed To Rating Under Review From Stable
The principal methodology used in these ratings was Global Technology Hardware published in October 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.