VMware will distribute a special cash dividend of between
$11.5 billion and $12 billion to all its shareholders, including Dell, which
will receive between $9.3 billion and $9.7 billion, in the transaction that is
expected to be tax-free.
The spinoff, first proposed in a filing last July, will help
Dell lower its long-term debt of $41.62 billion, much of which was taken on
during its 2016 acquisition of data management firm EMC. Dell hopes doing so
will help it achieve an investment grade rating and simplify its capital
structure.
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.
Shares of Dell jumped more than 8.4% in extended trading,
while VMWare stock rose 1.5%.
VMware interim Chief Executive Officer Zane Rowe told
Reuters in an interview that VMware will use between $2.5 billion and $3
billion 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 move is long overdue. Great news to Dell
shareholders as it unlocks the value that's stuck in the VMWare
ownership," said Dan Ives, analyst at Wedbush Securities, adding that the
dividend Dell expects to receive is 10% higher than the Street's bull case.
Elliott Management Investment, one of Dell's largest
shareholders, said it strongly supports the spinoff in a statement.
The companies said the deal will simplify their capital
structures. Both will also enter a commercial arrangement to continue to align
sales activities and develop new products jointly. Under the agreement,
executives at both companies will have compensation tied to the success of the
partnership, Rowe told Reuters.
The spinoff could also allow VMware to strike more
partnerships with major cloud computing providers including Amazon and
Microsoft, which are also Dell's primary technology competitors.
"This will clearly give us a lot of flexibility
strategically to do more partnerships," Rowe said.
VMware, whose software helps companies squeeze more work
from data center servers, has been looking for a chief executive officer after
previous boss Pat Gelsinger was tapped to lead Intel Corp. Rowe said the
company had no updates on the CEO search.
The deal is expected to close in the fourth quarter. - Reuters
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