Dell draws debt upgrade after closing $60 bln EMC acquisition

  • Dell floats $23 bln in first lien notes, senior unsecured notes
  • Deal creates largest private tech company in the world
  • Take-private acquisition of EMC closed on Sept 7


Dell Inc’s $60 billion acquisition of EMC not only created the world’s largest private tech company, but the computer giant emerged with stronger credit, with plans to quickly cut its debt load, Moody’s Investors Service says.

Dell will channel an expected $8 billion in proceeds from divestitures to cut its debt to about 4x EBITDA by the end of 2017 from 6x when the deal closed Sept. 7. The combined company is expected to generate $5 billion of cash flow in 2017.

“Despite the significant increase in debt and initial leverage, Dell’s overall credit profile will be enhanced with the additional scale of EMC,” Moody’s analyst Stephen Sohn said in a note. “Dell and EMC’s combined product portfolio of client, data center, and storage solutions will position Dell to compete effectively in a technology environment shifting to hybrid cloud computing platforms.”

Dell, Round Rock, Texas, already announced the sale of its services unit for more than $3 billion to NTT Data of Japan and the $2 billion divestiture of its software unit to Elliott Management and Francisco Partners. The company also expects to net out $2.6 billion in cost synergies in the EMC deal.

The debt-rating firm said it expected low-single-digit marketing revenue growth for Dell’s server and storage business.

Moody’s upgraded Dell’s corporate credit rating to Ba1 from Ba2. Moody’s says notes with that rating are deemed speculative with substantial credit risk.

The rating reflects “considerable key-man risk” associated with founder Michael Dell’s majority stake and the long-term potential exit of Silver Lake, a backer of Dell, Moody’s said.

“Uncertainty over whether the strategic shift to higher margin enterprise solutions can be achieved organically is a rating constraint,” Sohns said.

The $60 billion merger included up to $4.4 billion from Michael Dell, from funds affiliated with Silver Lake Partners, and an affiliate of Temasek Holdings (Private) Ltd.

The deal also drew up to $26.3 billion from financial institutions and refinancing debt of Dell and EMC.

During the three months ended July 29, Dell issued a total of $20 billion of first lien notes and $3.25 billion of senior unsecured notes, according to a filing.

Separately, Dell plans to cut as many as 3,000 jobs as a result of the EMC deal, Bloomberg reported.

Most of the job cuts will come in the U.S. in supply chain, marketing and administrative units. The combined company will move forward with 140,000 employees.

Action Item: Silver Lake’s tech portfolio:

Dell Inc. Chairman and CEO Michael Dell arrives at the launch event of the Windows 8 operating system in New York on October 25, 2012. Photo courtesy Reuters/Lucas Jackson