Dell Technologies Inc. (DELL) has completed the spinoff of its 81% ownership in VMware, Inc. (VMW), notes Jim Kelleher, an analyst with Argus Research — a leading independent Wall Street research firm.
DELL shareholders of record as of 10/29/21 received approximately 0.441 share of VMW for each DELL share held as well cash in lieu of fractional share.
Given the $125 price of VMW as of the 11/1/21 distribution date and DELL and VMW shares outstanding at that time, the value of the VMW distribution to DELL holders is equal to about $50 per share. The DELL share price adjusted to $56.52 on 11/1/21 to reflect the distribution ratio.
At this time, we recommend that DELL shareholders retain VMC shares obtained in the distribution. Argus intends to initiate coverage of VMware during the calendar 2022 year.
The value of the distribution in absolute dollars was approximately $11.5 billion. Given that Dell Technologies was the majority holder of VMW shares, Dell received value of $9.3 billion, which it will use as part of its ongoing program to pay down debt related to the EMC purchase in 2016.
We believe the spinoff of VMware makes strategic sense. It is also financially smart, in that it should reduce Dell’s debt while potentially unlocking sum-of-the-parts valuations for both companies.
We have restated our financial model for the January 2021 fiscal year, fiscal 2022 to date, and all periods thereafter. We expect to use future information from the company to fine-tune our model further, including subsequent to the Dell Technologies 3Q22 results release on 11/23/21.
At its September 2021 investor event, Dell described its strategy to unlock value in its Client Solutions and Infrastructure Solutions businesses. The company also announced a new $5 billion share-repurchase authorization and plans to pay a dividend to DELL common holders beginning in its fiscal 2023 first quarter (winter 2022).
We have reduced our EPS forecasts to reflect new top-line growth and margin realities at Dell following dis- position of a high-margined and faster-growing software business. At the same time, reduction in our estimates is not commensurate with reduction in the share price, which was effectively cut in half.
On that basis from a valuation perspective, DELL is inexpensive by historical standards and relative to peers. We are reiterating our near- and long-term BUY ratings. On a post-VMware basis, we are raising our spinoff adjusted 12-month target price to $70 from $63 ($125 pre-spinoff).
