VMW will pay a special cash dividend of between $11.5 billion to $12 billion to VMW’s shareholders, which will include around $9.5 billion for DELL.
Our view is that the market has consistently undervalued DELL’s core business in favor of attributing more value to the company’s 80.6% stake in VMW. We believe the upcoming stake distribution allows DELL to unlock immediate value by lowering the conglomerate discount and giving a quick upside opportunity for shareholders.
Additionally, the spinoff is an opportunity to lower DELL’s leverage and help achieve an investment grade rating, evaluate new growth opportunities, consider future M&A, and contemplate returning capital to shareholders in dividends of its own.
This move will lead to the removal of Dual Class Structure. VMW currently trades with a dual class of shares (Class A and B shares). Post-spinoff, the conversion of Class B shares to Class A will increase the free float on VMW in the market, which helps structure VMW to enter into the S&P 500 Index.
Rebalancing announcements for the S&P 500 Index are made on the first Friday of the month prior to the rebalancing so March, June, September and December. As a result, we expect an announcement on December 3, 2021. We anticipate a spin off date of early November 2021.
Looking at the base case for potential technical upside from this upcoming catalyst, we see a split price post-spinoff gain for DELL of +34%. A bullish case could see potential upside of 56%.