The Deal: Dell LBO Debt Deal Signals IPO Option

Tickers in this article: DELL

NEW YORK ( The Deal ) After his long-fought battle with Carl Icahn, one might think Michael Dell would rest on his laurels and keep Dell  the private, nimble startup he is promising the world. However, buried in the financing details for the nearly $25 billion leveraged buyout, backed by Silver Lake , is a hint that options are being kept open for a return trip to the public markets.

The roadshow for Dell's $3.25 billion bond offering backing its buyout is kicking off this week. The offering includes $2 billion of first-lien seven-year senior notes and $1.25 billion of second-lien eight-year senior notes.

Both tranches have three years of call protection, but the second-lien notes have a clawback that would allow 50% of the notes to be called at par plus half the coupon in case of an initial public offering.

"It's a little unusual because they've just gone private," said Richard Farley, a leveraged finance partner at Paul Hastings LLC.

What the clawback does for Dell is that it will allow it to pay off some of the more expensive second-lien debt if it should decide to go public during the second year following the financing, something that would be appealing to investors reading the company's S-1 filing.

And 50% is high for this type of provision. Most equity clawbacks are set between 30% and 40%, another indication that Michael Dell and Silver Lake are considering the capital structure of the company from all strategic angles.

Argus Research Co. analyst Jim Kelleher said taking Dell private to sort out its financial situation was a good strategy but, at a minimum, this company would need three to five years to even think about going public again. That said, Kelleher did not remember seeing an IPO clawback in other buyout situations recently.

"I don't recall that same sort of detail in some other takeouts," Kelleher said. "But this LBO is so large that it's hard to come up with comparisons."

There is the example of the take-private of Hertz Global Holdings Inc. in December 2005 for $15.6 billion by a private equity group led by Clayton, Dubilier & Rice LLC. The buyout consortium took the company public eleven months later.

The major difference between the Hertz and Dell situations, however, was that the car rental chain was doing well when it went public again. Revenue was up 8%, and EBITDA was up 9% following the buyout.

Dell on the other hand, is facing a worldwide secular decline of its signature product: the personal computer. PC sales suffered their steepest decline ever in the first quarter of this year, plummeting 14% according to a survey from International Data Corp.

Dell's EBITDA dropped 22.6% for the fiscal year ending in February 2013 from 2012, according to Bloomberg data. The market had priced the company at under $9 per share in late 2012 before buyout talk began to circulate and the company ended up being sold for $13.75 per share.