Text size
Denis Doyle / Bloomberg
Analysts at JP Morgan and Morgan Stanley are optimistic about the announcement by Dell Technologies that it is considering a spin-off of its valuable 81% stake in VMware.,
It is now worth more than all of Dell’s market value.
Dell shares (ticker DELL) rose 13% in early trading on Thursday to $ 59.72 as investors bet that Dell, led by its chief executive officer and controlling shareholder Michael Dell, will successfully reach a deal with VMware (VMW) to allow spin off.
JP Morgan analyst Paul Coster added Dell to his analyst focus list and said the upside potential in the stock could be as high as $ 80 a share. Morgan Stanley analyst Katy Huberty raised her Dell rating to Overweight of equal weight and raised her share price target to $ 68 from $ 50.
In a customer note, he wrote that there is a “greater likelihood of a VMW turnaround” and that Dell offers a “combination of 1) market share gains, 2) decommissioning, and 3) simplified ownership structure.”
A turnaround could occur no earlier than September 2021 for tax reasons. VMware’s stake, approximately 338 million shares, is worth approximately $ 47 billion, or $ 63 per share, from Dell based on VMware’s closing price on Wednesday of $ 139.70. A VMware spin-off could reduce the discount from the sum of the shares Dell has traded since it went public in late 2018.
“The probability of execution seems quite high for this analyst, so we expect an immediate benefit for Dell shares, even with a year of waiting,” Coster wrote. “Catalysts for the coming year include: 1) improved visibility as the global economy recovers from the Covid-19 pandemic, 2) continued gain in market share fueled by new products, 3) debt payments, and 4) probability of (and proximity to) the proposed VMW turn. “It has an overweight rating and a price target of $ 68.
In addition to unlocking the value of VMware, a spinoff could benefit Dell because the company would seek to negotiate a one-time cash dividend for VMware payable to all shareholders. That would reduce Dell’s debt, which totals about $ 40 billion, excluding its financial unit.
Huberty said a single VMware dividend could be $ 13 billion, with more than $ 10 billion going to Dell.
Dell said Wednesday that in a dividend scenario, it would seek to achieve investment grade debt ratings for both Dell and VMware. However, a $ 13 billion dividend could be on the high side, given that software companies generally like to maintain strong balance sheets. VMware now has around $ 2 billion of net debt.
Barron’s has written favorably at Dell. Last month, we presented a scenario in which Dell would receive a sizeable dividend from VMware to help it reduce debt as part of a spin-off.
We also suggest that Dell convert its VMware supervoting shares into common stock and that Michael Dell should do the same with Dell’s supervoting shares that he and Silver Lake now own.
Write to Andrew Bary at [email protected]
.
