Michael Dell, chairman and CEO of Dell at 2015 WEF in Davos, Switzerland.
David A. Grogan | CNBC
Dell shares rose as much as 9% in extended trading on Wednesday after the company announced its plan to proceed with the spinoff of its 81% ownership of enterprise software maker VMware. The deal should close in the fourth quarter of 2021.
The move isn’t a surprise. Dell is moving forward with a process it has long considered as a means of paying down its debt.
VMware will collectively distribute a cash dividend worth $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, giving the company a speculative grade, according to S&P Capital IQ.
When the deal closes, Dell shareholders will receive 0.44 shares of VMware stock for each Dell share, although the ratio could vary. VMware stock will take on a single-class structure after the deal as VMware class B shares become class A shares. Dell and VMware will continue a commercial relationship.
“We felt like this was beneficial for our shareholders because it eliminates a dual-class share structure, and it allows us to operate in broadened ecosystem,” VMware Chief Financial Officer Zane Rowe said in an interview.
Last year, Dell said it was considering a spinoff and that any deal would not happen before September 2021. CNBC reported last year that Silver Lake and other Dell shareholders supported the idea, partly for tax reasons.
Dell took on considerable debt through its 2016 acquisition of data storage hardware maker EMC, which acquired VMware in 2004 and later floated a small stake in the company in an initial public offering.
“After a comprehensive review of potential strategic options, both parties determined that this transaction will simplify capital structures and create additional long-term enterprise value,” Dell said.
Pat Gelsinger, who had continued to run VMware through the Dell acquisition, in February left VMware to run Intel, where he had formerly been a top executive. VMware shares moved 1% higher after Wednesday’s announcement.
VMware has been somewhat constrained to work with other companies due to Dell’s large ownership. Operating as an independent company will give VMware “more opportunities to have more partnerships with different companies,” Rowe said.