Dell To Spin-Off 81% Stake In VMware; Shares Pop 8.5%

Dell Technologies’ shares rose 8.5% in pre-market trading on April 15 as the company announced the spin-off of its approximately 81% equity stake in VMware. The spin-off will result in two standalone companies and the transaction is expected to close in the fourth quarter of this year. The spin-off is anticipated to unlock “significant value for stakeholders”.

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Dell Technologies’ (DELL) Chairman and CEO, Michael Dell said, “By spinning off VMware, we expect to drive additional growth opportunities for Dell Technologies as well as VMware, and unlock significant value for stakeholders. Both companies will remain important partners, providing Dell Technologies with a differentiated advantage in how we bring solutions to customers.”

“At the same time, Dell Technologies will continue to modernize its core infrastructure and PC businesses and embrace new opportunities through an open ecosystem to grow in hybrid and private cloud, edge and telecom,” Dell added.

The completion of the spin-off will result in Michael Dell remaining as Chairman and CEO of Dell Technologies and Chairman of VMware (VMW).

At the close of the transaction, VMW will pay out a special cash dividend ranging between $11.5 billion and $12 billion to all VMware and Dell shareholders. Based on DELL’s current 80.6% stake in VMW, the company will receive a payout of between $9.3 billion and $9.7 billion and intends to use the proceeds of the transaction to pay down debt. (See Dell Technologies stock analysis on TipRanks)

Shareholders of DELL will also receive 0.44 shares of VMW for each share of DELL held based on the number of shares outstanding as on April 14.

The spin-off is expected to strengthen DELL’s capital structure and its “leadership position in growing technology infrastructure and client markets”. DELL also foresees expanding into new growth areas of edge, 5G, hybrid cloud, telecom and data management.

Yesterday, Morgan Stanley analyst Kathryn Huberty reiterated a Buy rating and a price target of $107 on the stock. Huberty commented after hosting a webcast with Dell CSG segment President, Sam Burd, “The demand for flexible offerings is also driving a strong mix shift away from desktops and towards notebooks, which Sam noted have 1.5 yr shorter replacement cycles on average. The combination of these factors should drive a meaningful increase in the number of PCs per household, which in the US we estimate was 1.1 in 2020 based on historical consumer PC shipments.”

Overall, the Street is bullish on the stock with a Strong Buy consensus rating based on 8 Buys and 2 Holds. The average analyst price target of $93.40 implies that the stock is fully priced at current levels.