How Will Dell Fund the EMC Acquisition?



High yield for Dell’s debt issuance

Dell is planning to sell approximately $9 billion of unsecured junk bonds backing the EMC Corp. (EMC) acquisition. Dell is largely expected to pay an interest rate of ~10% unless there is a major improvement in the bond market.

High debt yields are a result of soft quarterly results announced by tech firms such as Intel (INTC), as well as the poorly received debt sale by storage company Western Digital (WDC) to fund the SanDisk (SNDK) acquisition. A high debt yield would result in the addition of millions of dollars as an interest expense for Dell.

The negotiations between Dell and debt investors is expected to take place in June 2016 after the EMC shareholders vote on the takeover proposal.

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Proceeds from asset sales

Recently Dell sold off its information technology services division to Japan’s (EWJ) NTT Data Corp. for $3 billion. This would reduce Dell’s borrowing needs. Dell’s SecureWorks unit also sold 8 million shares in an initial offering at $14 per share last week, which was below expectations.

Dell will not be able to raise its debt levels significantly, as a large number of secured bonds would impact investment-grade ratings.

Earlier this year, Western Digital planned to issue $4.1 billion of unsecured bonds at an interest rate of 9%. However, the firm was forced to issue ~$3.4 billion of unsecured bonds at an interest rate of 10.5%.

The tech industry witnessed its biggest merger of all time in October 2015, when Dell and EMC Federation (EMC) announced a merger valued at approximately $67 billion. According to a rough estimate, the deal will bring EMC’s share value to $33.15, which is a premium of ~28% from the price before the news of a possible deal was leaked. Dell will own approximately 70% of EMC’s common equity.


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