Shares in Dell Technologies (DELL) surged 7% in pre-market trading as the PC maker said that it is considering a spin-off of its 81% stake in cloud computing software maker VMware Inc. (VMW), which could unlock value for shareholders.
The stock soared to $56.40, while VMware rose 1.9% to $142.40 in Thursday’s early market trading. Dell said that a divestment could benefit both Dell and VMware shareholders by simplifying capital structures and creating additional long-term enterprise value. A potential spin-off is not expected to occur before Sept. 2021 and would qualify to become tax-free for U.S. tax purposes.
If the PC maker decides to pursue a spin-off, it would set up a special committee to negotiate mutually beneficial commercial arrangements, including intellectual property agreements. In that event Dell would seek to negotiate the payment of a special cash dividend by VMware that would be paid on a pro rata basis to all VMware shareholders.
“For more than 20 years, we’ve innovated for our customers and created substantial growth and value for both companies and our teams. Regardless of the options we are exploring to create additional value, we are accelerating our strategy – which remains unchanged,” said Dell CEO Michael Dell. “We are focused on winning in the consolidating markets where we operate and innovating across the Dell portfolio to create integrated solutions that turn data into insights and action.”
Dell added though that it continues to evaluate a range of strategic options concerning its ownership interest in VMware, including holding on to its current ownership in the company.
Meanwhile, five-star analyst Daniel Ives at Wedbush, said that 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 likely path in our opinion and the one most appetizing to investors would be a tax-free spinoff for this stake,” Ives wrote in a note to investors. “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 ultimately decided to head down this path.”
Ives estimated that if Dell did not own VMware this would add $15 to $20 per share as he expects a positive knee jerk reaction from investors. However, the analyst cautioned that it was too early to pop the champagne yet as there could be many twists and turns in this strategic relationship which could potentially end with no deal at all.
Ives maintains a Buy rating on VMware stock with a $175 price target given its “position in the cloud evolution with an expanding product footprint that could see an acceleration of growth for the coming years”.
Overall, analysts have a cautiously optimistic outlook on the stock. The Moderate Buy consensus shows 12 Buy ratings vs 6 Hold ratings. The $170.67 average analyst price target implies 22% upside potential over the coming year. (See VMW stock analysis on TipRanks).
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