Dell Inc. (DELL) & Carl Icahn: The Latest

In other words, they need to convince shareholders that Dell would be significantly undervalued at $13.65 per share.

Who will take Icahn’s money?
If Carl Icahn Enterprises LP (NASDAQ:IEP) can’t convince many people that the stub stock will be worth more than $1.65 in his leveraged recapitalization, he’ll lose the proxy battle, and the Dell-Silver Lake proposal will be approved. By contrast, if he convinces most Dell shareholders that the stub stock will be worth at least $1.98 and as much as $5.35, then it’s likely that far more than 20% of shareholders will opt for additional Dell stock rather than cash. After all, according to Icahn’s math, the “extra” stock would be worth at least $14.40, whereas the cash option is just $12.

If 50% of the shareholder base opts for additional stock, this would significantly reduce the amount of debt needed to finance the leveraged recapitalization, but it would also result in severe dilution of Dell stock. The Carl Icahn Enterprises LP (NASDAQ:IEP)-Southeastern proposal assumes that 20% of shareholders would opt for additional stock, which would raise the diluted share count from 1.8 billion to 4.42 billion. If 50% opt for additional stock, the share count would go to 8.34 billion. This increase in share count would leave the stub stock’s EPS well below Icahn’s projections.

Foolish conclusion
As I’ve stated before, I think the Dell-Silver Lake $13.65 per share offer is fair, and that shareholders should take the money and run. Dell’s dismal Q1 adjusted EPS of $0.21 — down 51% year over year — seems to support management’s contention that this will be a long, painful turnaround best undertaken as a private company.

If Carl Icahn Enterprises LP (NASDAQ:IEP) and Southeastern Asset Management continue to pursue their leveraged recapitalization idea, they’ll have to do a lot of work to convince Dell shareholders that the stub stock would be worth more than $1.65. However, if they do their job too well, a flood of shareholders will want “extra” Dell stock rather than a $12 cash payout. Striking the right balance — i.e., getting most Dell shareholders to take $12 in cash and a stub stock rather than all cash from Dell and Silver Lake or all-stock from Icahn and Southeastern — could prove to be an impossible task.

The article Will Any Dell Stock Owners Take Carl Icahn’s Money? originally appeared on Fool.com is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg and The Motley Fool have no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.