Dell Technologies Inc on Wednesday said that it would spin off its stake in VMware Inc, creating two publicly traded companies and raising cash to pay down debt. Its shares jumped on the announcement.
The spinoff would unwind, at least in part, a consolidation created five years ago in Dell’s US$67 billion acquisition of VMware’s parent, EMC Corp. The spending spree helped Dell branch out from its origins as a PC maker, but left the company saddled with debt.
VMware would distribute a special cash dividend of US$11.5 billion to US$12 billion to shareholders at the close of the deal, which is expected by the fourth quarter, Round Rock, Texas-based Dell said in a statement.
Dell, which owns 81 percent of VMware, would receive a payout of as much as US$9.7 billion.
“We expect to drive additional growth opportunities for Dell Technologies, as well as VMware, and unlock significant value for stakeholders,” chairman and CEO Michael Dell said. “Both companies will remain important partners.”
The spinoff would provide Dell with cash to live up to promises to investors to reduce its debt load, which was US$48.5 billion at the end of the first quarter.
The company said that “core debt” was US$29.2 billion when it reported earnings on Feb. 25.
VMware was founded in 1998 and acquired by EMC in 2004, which sold part of its stake in an initial public offering three years later. EMC’s holdings in the maker of data center software passed to Dell when it acquired EMC in 2016.
Asked about their decision to reverse the industry consolidation strategy relatively quickly, Dell executives said that the split benefits investors, adding that the stock market has not given the combined company an appropriate value.
“We think this is a move in the right direction for Dell and it helps unlock the sizable conglomerate discount that is currently embedded,” Evercore ISI analyst Amit Daryanani said.
Dell has a five-year commercial agreement with VMware to continue to market and sell the software maker’s products.
Currently, about 35 percent of VMware’s revenue comes through Dell’s sales force.
The separation from VMware would give Dell more than US$9 billion to add to the US$5 billion of debt it plans to pay down this year.
VMware would also take US$4.8 billion of debt off Dell’s books when the transaction is completed.
Dell is on the path to an investment grade from debt ratings services, Dell chief operating officer Jeff Clarke said in an interview.
Dell shares rose about 8 percent in extended trading after closing at US$92.70 in New York on Wednesday. The stock has gained 26 percent this year.
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