Dell had previously said it was considering a spinoff of its VMware stake.
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In a move that investors had widely anticipated, Dell Technologies late Wednesday announced a plan to spin off its 80.6% stake in VMware to shareholders. Dell said the deal is expected to close in the 2021 fourth quarter, subject to various conditions, including an IRS letter confirming that the transaction will be tax-free.
Dell (ticker: DELL) had previously said it was considering a spinoff of its VMware stake.
VMware (VMW) at close would pay a special cash dividend of $11.5 billion to $12 billion to shareholders; Dell would receive between $9.3 billion and $9.7 billion of the total, and would use the cash to pay down debt. Dell said the improved balance sheet should position it for an investment-grade credit rating.
VMware will fund the special dividend through a combination of $2.5 billion to $3.5 billion in cash on hand, with the rest through newly issued debt, Dell Chief Financial Officer Tom Sweet said in an interview with Barron’s.
While VMware will lever up its balance sheet to complete the transaction, Sweet said terms require that both companies end up with balance sheets that would be considered investment grade by the debt-rating agencies. He said Dell has been in “close coordination” with the credit-rating firms on that issue.
Sweet declined to give specific guidance about what Dell’s financial results will look like on a pro forma basis after the spin. But he did say that the transaction and the deconsolidation of VMware’s financial results should result in about an $800 million reduction in Dell’s annual interest expense.
Sweet said he expects that by the end of the current fiscal year, Dell’s core debt position (leaving out subsidiary debt and debt related to Dell Financial Services) should be in the $17 billion to $17.5 billion range, down from $29 billion at the end of the January quarter.
Dell shareholders would receive 0.44 VMware share for each Dell share held, subject to adjustment prior to close. The company said VMware would shift from a multiclass to a single-class share structure, while Dell Technologies’ share structure would remain the same. After the transaction, Dell won’t own any shares in VMware, while CEO and founder Michael Dell will hold about 44% of VMware’s stock.
Dell said the two companies would sign a commercial agreement to “preserve the companies’ unique and differentiated approaches to the co-development of critical solutions and alignment on sales and marketing activities.” Dell said VMware would continue to use Dell Financial Services to help its customers finance contracts.
“By spinning off VMware, we expect to drive additional growth opportunities for Dell Technologies as well as VMware, and unlock significant value for stakeholders,” Michael Dell said in a statement. “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.”
Michael Dell would remain chairman and CEO of Dell Technologies, as well as chairman of the VMware board. Zane Rowe would remain interim VMware CEO. The VMware board would be unchanged.
Dell stock was up 8.2%, at $100.25, in after-hours trading. VMware shares, after initially trading lower, were up 2.4%, at $159.20.
Write to Eric J. Savitz at [email protected]
