Michael Dell, Chairman and CEO of Dell at WEF 2015 in Davos, Switzerland.
David A. Grogan | CNBC
Dell shares rose a whopping 9% in expanded trading on Wednesday after the company announced its plan to proceed with the spin-off of its 81% ownership from enterprise software maker VMware. The deal should be completed in the fourth quarter of 2021.
The move is no surprise. Dell is moving forward with a process it has long considered as a way to pay off its debt.
VMware will collectively pay a cash dividend of $ 11.5 billion to $ 12 billion to shareholders, including Dell, Dell said in a statement. Dell will receive $ 9.3 billion to $ 9.7 billion, which will position it well for investment-grade ratings, the company said. Dell currently has a BB + credit rating from S&P Global, according to S&P Capital IQ, which gives the company a speculative figure.
When the deal closes, Dell shareholders will receive 0.44 VMware shares for each Dell share, although the ratio can vary. VMware shares will have a single structure post-deal as VMware Class B shares will become Class A shares. Dell and VMware will continue a commercial relationship.
“We felt this was beneficial for our shareholders as it eliminates a two-class stock structure and allows us to operate in a broadened ecosystem,” said Zane Rowe, VMware’s Chief Financial Officer in an interview.
Last year, Dell said it was considering a spin-off and that a deal would not take place until September 2021. CNBC reported last year that Silver Lake and other Dell shareholders supported the idea, in part for tax reasons.
Dell took on significant debt through the 2016 acquisition of data storage hardware manufacturer EMC, which acquired VMware in 2004 and later acquired a small stake in the company in an IPO.
“After an in-depth assessment of potential strategic options, both parties have determined that this transaction will simplify capital structures and create additional long-term business value,” said Dell.
Pat Gelsinger, who had continued to run VMware through the Dell acquisition, left VMware in February to lead Intel, where he had previously been a top executive. VMware shares were up 1% higher after Wednesday’s announcement.
VMware has been somewhat limited to partner with other companies because of Dell’s large ownership. Operating as an independent company gives VMware “more opportunities to build more partnerships with different companies,” Rowe said.
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