Dell Shares Could Be Worth Far More in a VMware Spinoff Scenario, Analyst Calculates
Dell Technologies shares could be worth more — maybe a lot more — if the company executes on its proposal to spin off its 81% stake in VMware to shareholders.
That is the conclusion that Evercore ISI’s Amit Daryanani reaches in a new sum-of-the-parts analysis of Dell (ticker: DELL) published on Friday. He repeats his Buy rating on the PC and enterprise storage company’s stock and lifts his target price to $105, from $88.
While the analyst notes that Dell has already seen considerable benefit from the potential spin –the stock is up 88% since The Wall Street Journal first reported on the idea last June — he thinks the stock could be worth $125 a share or maybe more.
The analyst says his new sum-of-the-parts analysis, based on peer group multiples for the company’s core businesses, plus the current market value for Dell’s publicly traded subsidiaries — with a 20% conglomerate discount — gets you to $110 a share. Remove the conglomerate discount, he says, and you get to $125. And you can get to higher prices, he adds, depending how VMware (VMW) holders value the company after the spinoff.
Daryanani notes that there are some reasons that Dell’s shares are discounted, including the company’s high level of debt, but he adds that his sum-of-the-parts analysis uses a conservative set of assumptions on the valuation of the various Dell business units.
The analyst notes that Dell and VMware continue to negotiate on several major points, including an ongoing commercial agreement and the magnitude of a special dividend that VMware would pay holders.
Daryanani says that a special dividend to VMware holders could be as large as $10 billion, with most of that going to Dell, which would use the cash to pay down debt. He thinks core Dell would see a higher valuation after that, given both the removal of the conglomerate discount and a strengthened balance sheet, with Dell returning to investment-grade debt status.
Fundamentals at Dell, meanwhile, are improving. He writes that “PC dynamics remain favorable,” while the company’s enterprise business “should be positioned to benefit from a better IT spending backdrop in 2021.”
In Friday morning trading, Dell shares were up 0.4%, to $92.95.
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