Thursday, June 11, 2009

Notable financing (DELL)

AlphaNinja - A few things. Yesterday afternoon(but with today's date?) the WSJ had a piece specualtiong about Dell's acquisition strategy going forward.

"While Dell officials have publicly said they want to do more deals, they have given few specifics. But Chief Executive Michael Dell expects his company to acquire a "significant-sized company" in coming months, according to a person who has spoken with the CEO.

The computer maker wants to expand its data-storage and tech-services businesses, according to people who have recently spoken with its chief financial officer, Brian Gladden.
Dell is doing more than just talking about deals. On Wednesday, the company, which has more than $9 billion in cash reserves, added more financial firepower by selling $1 billion in bonds. It has also hired a high-profile M&A executive from rival International Business Machines Corp."

While the acquisition speculation is very interesting, I think the most interesting detail lately is the price at which Dell sold debt. They raised $400m due 2012 at 3.4%, and $600m due 2019 at 5.88%. Below is a look at Dell's valuation and Free Cash Flow. (Yes I exlude debt from the company's "purchase price," because they cover their interest payments by a massive margin.)

Market Value - $25.5billion
Cash & Equiv. - $10billion
Net mkt Value - $15.5billion

2010 FCF - $2billion
FCF% of Mkt Value - 13%

Their cost of capital is 5-6%. (Yes, I reject the notion that equity financing is more expensive than debt) If you bought Dell it would return 13% annually. Thus it is still a BUY.

(Disclosure - long DELL shares)

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