NEW YORK, Oct. 5, 2018 /PRNewswire/ -- P. Schoenfeld Asset
Management ("PSAM"), a registered investment adviser that advises
clients who own more than $150
million of shares of Dell Technologies, Inc. ("Dell") Class
V Common Stock ("DVMT"), today released a presentation opposing the
proposed conversion of the DVMT shares into publicly traded Class C
Common Stock and cash and the elimination of the tracking stock
(the "DVMT Transaction") on the terms currently proposed by
Dell. PSAM also released a letter that it delivered to the
Dell Board of Directors on September
27 outlining its reasons behind its opposition of the DVMT
Transaction.
As outlined in the presentation, PSAM strongly believes that the
path to maximize value for both Dell and DVMT holders can only come
in the form of a deal that is equitable to both sides and intends
to vote against the currently proposed transaction.
Specifically, the presentation filed today outlines PSAM's
rationale, including:
- The current targeted offer price of $109 per share of DVMT represents too wide of a
discount to the underlying value of VMware and does not deliver
compensation to DVMT holders commensurate with their contribution
to the newly formed Dell.
- PSAM believes at least a 20% improvement to the consideration
would narrow the discount to 17% or lower and would be fair to both
sides; Dell's Class A, B and C shares would incur much greater
dilution if they pursued an IPO without first buying in DVMT.
- Collapsing the tracker structure and buying in the DVMT class
is essential for the future of Dell Technologies.
- An IPO of Class C without a negotiated outcome for DVMT is not
a viable path and does not address the terms of the DVMT buy in and
defers it to a later date. As such, it is NOT in the best
interest of Dell and would actually leave DVMT holders owning a
larger stake in the restructured entity than under the current
proposed deal.
- An improved equity ratio, additional cash, CVR structures and
warrants are all alternatives which could be utilized to reduce or
eliminate DVMT's discount to the underlying VMware price.
The full presentation outlining PSAM's rationale for opposing
the DVMT Transaction can be found at
https://www.sec.gov/Archives/edgar/data/1040198/000090266418003638/p18-1878px14a6g.htm.
PSAM has publicly released the letter that it sent privately to
the Dell Board of Directors on September
27 as a result of the Company's failure to issue a
substantive response to the significant concerns raised
within. The full text of the letter follows:
Board of Directors
Dell Technologies Inc.
One Dell Way
RR1-33
Round Rock, Texas 78682
September 27, 2018
Dear Members of the Board:
P. Schoenfeld Asset Management LP is a registered investment
adviser and, together with its affiliates (collectively, "PSAM")
advises clients who are shareholders in Dell Technologies Inc.
("Dell") through their aggregate ownership of the publicly-traded
DVMT shares totaling over $150
million. We have reviewed the public disclosures in
connection with the proposed conversion of the DVMT Common Stock
into publicly traded Class C Common Stock and cash and the
elimination of the tracking stock (the "DVMT Transaction") and have
considered the rationale of the Board of Directors of Dell (the
"Board") in approving the DVMT Transaction. Based on our
extensive and detailed analysis, we believe that the proposed DVMT
Transaction in its current form is not in the best interests of the
Dell public shareholders because it deeply undervalues the DVMT
Common Stock.
We agree that the buy-in of the DVMT Common Stock is the best
path to value creation for both Dell and DVMT holders.
However, the current offer price of $109 per share of DVMT represents too wide a
discount to the underlying value of VMware and does not deliver
compensation to DVMT holders commensurate with their contribution
to the newly formed Dell. PSAM firmly believes that Dell must
increase the offered consideration by 20% to narrow the discount
and value the DVMT stock more fairly. An improved equity
ratio, additional cash, CVR structures and warrants are all
alternatives which could be utilized to reduce or eliminate DVMT's
discount to the underlying VMware trading price. In the
absence of such an increase, we intend to vote against the DVMT
Transaction, and we believe that an overwhelming majority of the
DVMT holders will do likewise.
A fair offer to DVMT holders must narrow or eliminate the
excessive discount to VMware.
DVMT has always traded and continues to trade at a deep discount
to the underlying VMware shares it tracks. Neither Dell's
proposed DVMT Transaction nor the historical trading discount
reflect the legitimate contractual claims DVMT holders have to 50%
of VMware's economics. While Dell's advisor told us in the
Dell/EMC merger proxy that it expected DVMT to trade at a 0% to 10%
discount to VMware, in fact DVMT has averaged a 32% discount to
VMware from inception through January 25, 2018, the last
trading day before Dell's strategic review was reported in the
news. Applying Dell's contractual 20% premium1 to the
32% discount would imply an offer price for DVMT stock of
$129, 18% higher than the current
offer.
As long as the tracking structure remains in place, investors
will likely apply a discount to both the valuation of Dell's stakes
in public companies as well as to core Dell itself. PSAM
believes equity investors will also likely apply a wide discount to
the intrinsic value of any IPO of Dell
Class C Common Stock if it was pursued without first
consolidating DVMT holders and increasing Dell's stake in
VMware.
The current offer undervalues value creation to Dell from
DVMT
The DVMT Common Stock tracks ~50% of the economics of VMware,
the largest value driver of Dell's pro forma valuation.
The intrinsic value of the DVMT tracking interest in VMware at
current market prices is approximately $33
billion. The contribution of DVMT's interest in VMW in
turn represents more than half of our estimate of the pro forma
equity value for Dell following the completion of the proposed
exchange offer. We estimate that the 21% interest in pro
forma Dell plus the cash consideration (assuming the full cash
election under the proposed exchange offer) is worth approximately
$22 billion. Therefore, PSAM
believes that Dell's proposed offer undervalues the intrinsic value
of DVMT contribution to the pro forma company by at least
$11 billion.
If Dell pursues an IPO of its Class C Common Stock without
first buying in the DVMT holders, Dell's Class C Common Stock would
trade at an even larger discount than what is currently implied by
the DVMT trading price.
While we are aware that you claim to be "reexamining" a Dell
IPO, the inescapable conclusion is that such an IPO would cause
massively more dilution to the current Dell private shareholders
and increased consideration to the DVMT shareholders in the
inevitable buy-in. An IPO discount is appropriate due to the
overhang from the anticipated future dilution as a result of a
later redemption of DVMT shares, the cumbersome tracker structure
and the high leverage at core Dell. PSAM's estimated Class C Common
Stock valuation at an IPO absent prior redemption of the DVMT
Common Stock is at ~$58.00 per share,
which is much lower than the $79.77
per share valuation for Class C Common Stock that Dell is using
under the terms of the current DVMT Transaction.
Consolidation with VMware is needed to close the value
gap.
In order for Dell to achieve an attractive valuation in the
public markets for its Class C Common Stock, Dell must demonstrate
to investors strong financial metrics on a consolidated basis with
VMware. The best way to accomplish this is by buying in the DVMT
holders and eliminating their claim on VMware's cash flow and
economics. Redeeming the DVMT stock increases the earnings
and cash flow contribution to Dell from VMware's high growth
business. By buying in the DVMT Common Stock, Dell will
increase its effective direct ownership in VMware from ~32%
currently to ~81% and will simplify Dell's current ownership
structure. As a high growth software company, VMware receives a
much higher multiple of earnings and free cash flow than core Dell.
Increasing Dell's share of VMware economics will likely increase
the blended earnings multiple that Dell will receive.
DVMT redemption would reduce leverage and improve valuation
in the public markets.
Investor confidence in Dell's ability to achieve an optimal debt
structure is essential to an adequate valuation in the public
markets. A transaction to collapse DVMT would reduce the
leverage at Dell and would accelerate Dell's path to a 3.0x net
debt/EBITDA leverage ratio, even with the payout of an $11 billion dividend at VMware. Rating agencies
and equity investors consider 3.0x net debt/EBITDA a level that is
consistent with investment grade metrics.
Dell must provide improved terms to DVMT holders to secure
their support and reap the benefits from a DVMT repurchase.
We firmly believe that collapsing the tracker structure and
buying in the DVMT Common Stock is essential for the future of
Dell. Acquiring the DVMT Common Stock provides Dell with a
clear path to an optimal capital structure with investment grade
credit ratings, which in turn would ensure an appropriate valuation
for Dell in the public equity markets.
To secure the support of DVMT holders and reap the benefits from
buying in the DVMT stock, Dell must offer fair value to DVMT
holders. PSAM proposes a 20% increase in consideration to
DVMT holders in the form of an improved exchange ratio for Class C
Common Stock, additional cash and/or a potential CVR and/or
warrants that protect DVMT holders from execution risk at
Dell. This 20% improvement would result in DVMT holders
owning 27% of pro forma Dell. This is higher than the 21% under the
current proposed DVMT Transaction but lower than what we estimate
would be 31% in an IPO of Dell's Class C Common Stock followed by a
DVMT redemption. The adjusted terms still represent
consideration with a discount to the full intrinsic value of the
DVMT share class.
As you know, you have a fiduciary duty to act in the best
interests of all Dell shareholders, and we believe that the DVMT
Transaction you have proposed had certain defects as to process, in
addition to price, favors the interests of the current private Dell
shareholders and is grossly unfair to the DVMT holders.
Accordingly, we believe that your fiduciary duties require that you
improve the DVMT Transaction terms in order to treat the DVMT
holders fairly, and we urge you to implement changes such as those
we have suggested, in the interest of all parties. We have
attached an extensive financial analysis which supports in detail
all of the views we have expressed in this letter, and we would
appreciate the opportunity to present that analysis to the full
Board or to its selected representatives as soon as possible.
We look forward to hearing from you promptly.
Very truly yours,
P. SCHOENFELD ASSET MANAGEMENT LP
Peter
Schoenfeld
|
Rich
Bilotti
|
Igor
Kertzman
|
|
|
|
Chief Executive
Officer
|
Portfolio
Manager
|
Analyst
|
ABOUT PSAM
P. Schoenfeld Asset Management (PSAM) is a leading global
alternative asset management firm focused on investing in event
driven transactions. PSAM utilizes a fundamental research based
approach to analyze corporate events that may alter the control,
capital structure or corporate strategy of an organization. We
believe these events can frequently create mispricings of
securities relative to their inherent or ultimate realizable value.
Three main strategies are considered when investing: Merger
Arbitrage, Distressed/Stressed Credit Opportunities and Special
Situations.
In addition to offering institutional quality investment
research and risk management, we are committed to industry best
practices through our continued investment in operations,
compliance, client service and technology.
Warning Regarding Forward Looking Statements
THIS PRESS RELEASE CONTAINS FORWARD LOOKING STATEMENTS. FORWARD
LOOKING STATEMENTS CAN BE IDENTIFIED BY USE OF WORDS SUCH AS
"OUTLOOK", "BELIEVE", "INTEND", "EXPECT", "POTENTIAL", "WILL",
"MAY", "SHOULD", "ESTIMATE", "ANTICIPATE", AND DERIVATIVES OR
NEGATIVES OF SUCH WORDS OR SIMILAR WORDS. FORWARD LOOKING
STATEMENTS IN THIS PRESS RELEASE ARE BASED UPON PRESENT BELIEFS OR
EXPECTATIONS. HOWEVER, FORWARD LOOKING STATEMENTS AND THEIR
IMPLICATIONS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR AS A
RESULT OF VARIOUS RISKS, REASONS AND UNCERTAINTIES. EXCEPT AS
REQUIRED BY LAW, P. SCHOENFELD ASSET MANAGEMENT LP AND ITS
AFFILIATES AND RELATED PERSONS UNDERTAKE NO OBLIGATION TO UPDATE
ANY FORWARD LOOKING STATEMENT, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE DEVELOPMENTS OR OTHERWISE.
1 20% contractual premium assumes the buyout of DVMT
occurs within the first year of Class C Common Stock going
public.
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SOURCE PSAM