Dell VMware Spinoff Debated by Street as Real or ‘Head Fake’

Dell surged 12% following a report that it was mulling a spinoff of its 81% stake in VMware.


June 24, 2020

4 Min Read
VMware CEO Pat Gelsinger (L) shares the stage with Dell Technologies founder and CEO Michael Dell at VMworld 2017.
VMware CEO Pat Gelsinger (L) shares the stage with Dell Technologies founder and CEO Michael Dell at VMworld 2017.VMware

Cristin Flanagan (Bloomberg) -- Dell Technologies Inc. surged as much as 12% touching a seven-month high on Wednesday following a report that the computer maker was mulling a spinoff of its stake in VMware Inc.

While Dell is also said to be considering buying the rest of the company or doing nothing, a spinoff of its 81% stake could finally eliminate a VMware “albatross” that has been causing the stock to trade at a discount, Wedbush analyst Daniel Ives wrote. But it’s unclear if this is “another head fake for investors.”

Analysts at Citi saw a spinoff as speeding up the pace of deleveraging. But it isn’t seen as a necessary step since Dell is on a path to reach investment grade status in the next 18-24 months.

Morgan Stanley analysts see Dell and VMware as “better together,” and highlighted recent commentary from founder and Chief Executive Officer Michael Dell calling VMware a “crown jewel.” Last night Piper Sandler weighed in on VMware, saying shares could be worth more than $200.

VMware rose as much as 8.5% to the highest since Feb. 20.

Here’s what else Wall Street is saying:

Morgan Stanley, Katy Huberty

Morgan Stanley pointed to Dell’s chief financial officer, who said at an investor conference last week that there were no plans to sell the stake given the tax benefits. Also, the CEO called VMware a key element of its plans and a “crown jewel.”

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“While we are not aware of Dell’s plans nor has Dell confirmed that it is exploring options for its VMware stake, Dell’s recent public comments suggest the most likely path is the one that Dell is on - continuing to focus on share gains, tighter integration across Dell Technologies assets, and de-levering.”

Remains equal-weight on Dell.

Wedbush, Daniel Ives

“The Dell/VMware soap opera has been a multi-year ownership structure/partnership that has been a frustration point for investors since EMC sold its 81% stake to Dell in 2015.”

“The Dell ownership structure has been an albatross around the VMware story and ultimately causes the stock to trade at a discount, a dynamic that would be removed if Dell (and its Board) ultimately decided to head down this path.”

While Dell could buy the rest of VMware, Wedbush views that as unlikely. “If Dell did not own VMware we believe this would add $15 to $20 per share right out of the gates as we expect a positive knee jerk reaction on this news with investors digesting the reports.”

Rates VMware at outperform.

Evercore ISI, Amit Daryanani

Dell has “tremendous” value not currently reflected in its share price. Sum-of-the-parts analysis suggests the computer company may be worth roughly $80 a share.

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“Our valuation suggests Dell could be worth a significant premium vs its current trading price but some of the factors that could be weighing down the company’s current valuation include 1) high net leverage, 2) concentrated ownership (Michael Dell + Silver Lake), 3) conglomerate discount, and 4) corporate governance (limited voting rights).”

Dell’s stake in VMware is worth about $41 billion, while its SecureWorks Corp. ownership is worth $700 million.

Rates Dell outperform.

Citi, Walter Pritchard, Jim Suva

“Dell is likely looking at capitalizing upon the strong market by potentially doing a secondary offering/block disposal with help of underwriters.” A partial disposal of its VMware stake “could further enhance the pace of its de-levering.”

A spinoff would bolster VMware’s valuation by erasing the “ownership discount” from “perceived poor corporate governance.” Citi estimates this to be as much as 40% of enterprise value and implies at least a $25 per share benefit to Dell holders. “We think this is the real source of ‘juice’ in a potential chess move with VMW.”

A Dell take-out of remaining VMware holders continues to be unlikely as it would go against the company’s commitment to cutting its debt, and would cost as much as $16 billion.

Wells Fargo, Aaron Rakers

“The positive market reaction to the news is justified and reinforces our belief that a Dell Core value unlock could / would eventually need to take place (barring a material fundamental deterioration, especially as Dell Core de-leverages).”

“With the VMware optionality finally on the table, or rather Dell’s propensity to unlock the valuation of Core Dell,” Dell’s price target is raised to $70 from $57. Remains overweight Dell.

Stifel, Brad Reback

Stifel has long expected Dell to buy the rest of VMware that it doesn’t already own.

“A spin-out of VMware makes little long-term sense for Michael Dell given the secular headwinds that Dell’s core hardware business faces. Additionally, according to the WSJ article, a tax-free spin of VMware could not be achieved until Sept 2021, about 15 months from now.”

Raises VMware to buy from hold and increases price target by $30 to $196, as “the Dell fog is lifting.”

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