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Dell's Fate Hinges on Icahn

Stocks in this article: DELL IEP HP BX

NEW YORK ( TheStreet) - In another twist to Dell's (DELL) proposed $24.4 billion buyout, the struggling PC maker has entered a 'confidentiality agreement' with its newest big shareholder - activist investor Carl Icahn.

In a press release, Icahn's holding company Icahn Enterprises (IEP) said on March 10, it entered into a confidentiality agreement with Dell to review sensitive information such as the company's financials.

The statement, however, leaves a lot left for investors to wonder about. For instance, its still unclear the size of Icahn's investment in Dell or what will come from his due diligence.

On Thursday, Icahn made headlines by proposing that Dell abandon its $13.65 a share take-private deal and instead use debt financing and the company's cash coffers to pay investors a $9 a share special dividend. Dell has confirmed the activist investor has taken a stake in the company, but Icahn's yet to publicly disclose the size of his stake.

A Wednesday report by CNBC's David Faber indicates Icahn has taken a 100 million share stake, which would equate to a market value of over $1.4 billion at current trading prices.

While Dell has said it considered a special dividend along the lines of Icahn's proposal, the company said it remains confident the $13.65 a share buyout offer proposed by founder Michael Dell and private equity giant Silver Lake Partners remains the best option for current shareholders.

As part of the buyout, Dell is currently pursuing a 'go-shop' process with financial advisor Evercore Partners (EVR) to seek a bid higher than the Michael Dell-led consortium.

A Thursday report from Bloomberg News indicates PC market competitors Hewlett-Packard (HPQ) and Lenovo, in addition to private equity firm Blackstone Group (BX) are currently circling Dell's books.

Icahn's investment in Dell comes at a time when the Round Rock, Texas -based company is facing increasing scrutiny from investors over the terms of its proposed buyout.

Southeastern Asset Management, Dell's top independent shareholder with a near 8.5% stake, said in February that it would oppose the deal, citing a low-priced bid that it says undervalues the company by roughly $10 a share.

The investment manager favors a debt financed dividend similar to the transaction Icahn is proposing. A report from the Wall Street Journal indicates Southeastern Asset Management may be trying to assemble a competing takeover bid.

Icahn also may enter the fray. Media reports indicate Icahn considered a $15 a share tender offer for Dell before recommending the special dividend. With Icahn now locked into a confidentiality pact, it remains to be seen whethether the activist formally joins Dell's 'go-shop' process or remains a holdout seeking alternatives like the dividend.

Analysts are focusing on the impact of Icahn's engagement in Dell's buyout process, over the prospect of a competing bid from a tech-sector giant or a private equity firm.

" We think HP's board will have a tough time making an acquisition of this size and that Lenovo is too small," Peter Misek, an analyst at Jefferies, wrote in a March 7 note to clients."

"We think a Southeastern counterbid would be difficult to complete without Michael Dell's involvement. We also think Icahn could be satisfied with a raised bid."

Misek expects Icahn would be satisfied with a $15 a share takeover offer, while dismissing the value of a leveraged special dividend. " We view the leveraged recap as the worst-case scenario," Misek writes.

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