PSAM Files Presentation Opposing Proposed DVMT Transaction

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

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