Dell spins off VMware stake to pay $9.7 Billion to reduce the debt
Dell Technologies Inc said on Wednesday it would spin off its 81 percent stake in cloud VMware, in a move that will help the PC maker reduce its debt and the two companies will continue to operate without major changes for at least five years.
The proposal has come for delivering value to the shareholders, where VMware will distribute a special cash dividend of between $11.5 billion (roughly Rs. 86,450 crores) and $12 billion (roughly Rs. 90,220 crores) to all its shareholders, including Dell, which will receive between $9.3 billion (roughly Rs. 69,920 crores) and $9.7 billion (roughly Rs. 72,930 crores), in the transaction that is expected to be tax-free.
Dell will continue to resell VMware products – a critical arrangement for VMware as 35 per cent of its revenue comes from sales initiated by Dell, though one that Dell said it needs to work on because reselling VMware is currently a break-even effort. Dell hopes doing so will help it achieve an investment grade rating and simplify its capital structure. However, the products including VXrail and VMware Cloud on Dell EMC will remain unchanged.
VMware is currently Dell's best-performing unit and has benefited from companies looking to cut costs and move to the cloud, a shift that has been accelerated by the COVID-19 pandemic. Dell will use the cash to retire some of its own debt and therefore reduce interest payments. VMware will take on debt to fund the dividend, as it only has $4bn cash at hand, and spend the next couple of years paying down debt as soon as possible.
VMware interim Chief Executive Officer Zane Rowe told Reuters in an interview that VMware will use between $2.5 billion (roughly Rs. 18,80 crores) and $3 billion (roughly Rs. 22,550 crores) of cash from its balance sheet to pay the dividend and fund the rest with debt. Rowe said VMware expects to have an investment-grade credit rating after the transaction. The recent changes to the structure of the company’s shares also mean it can be listed in prestigious stock market indices, which tends to attract investors.
With this announcement, shares of Dell jumped more than 8.4 percent in extended trading, while VMWare stock rose 1.5 percent. The deal is expected to close in the fourth quarter this year, but could be called off if it isn't done by early 2022, if either company backs out, or if things go pear-shaped in various ways.
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