Michael Dell, Silver Lake To Retain Controlling VMware Stake: Sources

‘With a company that has a structure as complicated as Dell Technologies with all the subsidiary companies beneath them, frankly, this is something they should be doing to maximize everyone’s value, which includes the shareholders,’ says Zeus Kerravala, principal analyst at ZK Research, a market research firm.

Under a Dell Technologies proposal to spin off its stake in VMware, Dell Technologies CEO and VMware Chairman Michael Dell and his private equity partner Silver Lake will retain approximately 53 percent majority stake in VMware, sources told CRN.

If the spin-off is completed, Michael Dell will own approximately 42 percent of VMware, while Silver Lake will hold about 11 percent, sources said.

By spinning off its 81-percent stake in VMware to Dell Technologies shareholders, Dell Technologies will be able to improve its investment grade rating, pay down its $48 billion in debt, keep its highly successful partnership with VMware intact, attract new investors and clean up its capital structure, sources and analysts said.

“With a company that has a structure as complicated as Dell Technologies with all the subsidiary companies beneath them, frankly, this is something they should be doing to maximize everyone’s value, which includes the shareholders,” said Zeus Kerravala, principal analyst at ZK Research, a market research firm. “Because the more the company is worth, the more money the company can throw back into R&D, which is ultimately good for product, which is good for customers, which is good for channel partners.”

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The spin-off will provide more liquidity for Michael Dell and Silver Lake, sources said. Michael Dell currently owns 52 percent of Dell Technologies while Silver Lake owns nearly 14 percent, according to a Dell Technologies Proxy filing in May with the U.S. Securities and Exchange Commission.

Dell Technologies declined to comment on the matter beyond what was contained in a recent press release. Silver Lake declined to comment when reached.

After weeks of speculation, Dell Technologies confirmed last week that it is in the early stages of exploring a “spin-off” of its 81 percent stake in VMware. Sources told CRN that Dell Technologies plans to spin off its VMware stake to current Dell Technologies shareholders.

One key benefit to the transaction would be Dell boosting its investment grade rating, providing the $91 billion behemoth with more financial flexibility, lower debt service costs and the ability to drive increased shareholder value, said Kerravala.

“I don’t see any real downside to Dell’s plan,” he said. “It’s smart for Dell to be doing that. It’s not something you see often in the tech world. … Every company that has the diversity structure of someone like a Dell -- you look at outside IT like a leader like Procter & Gamble, there’s lots of companies like this – they should be looking at how the company is structured to maximize value for everybody. Because ultimately, that’s good for business. Good for product. Good for customers.”

Last month, the total valuation of the Round Rock, Texas-based company was hovering around $33 billion, with its stake in VMware worth around $47 billion -- thus giving Dell a negative value for its PC and market leading portfolio of storage, server, hyperconverged infrastructure.

When news of the Dell proposed spin-off came to light, it sent Dell shares soaring. Dell’s market capitalization is now $48.8 billion, while VMware’s is $60.5 billion, as of Monday evening.

Dell said in the SEC filing that spinning off VMware shares would boost its credit rating and help it achieve an investment grade rating quickly. For example, Bank of America raised its price target for Dell from $60 per share to $70 per share following the Dell-VMware spin-off news.

“Dell Technologies goal would be to (1) maintain VMware’s credit rating of investment grade and (2) improve Dell Technologies’ credit rating at, or shortly following consummation of, the spin-off,” said Dell Technologies in a recent filing with the U.S. Securities and Exchange Commission.

Another key benefit from Dell’s proposed VMware spin-off would be lowering its massive $48 billion in long-term debt stemming from its blockbuster $67 billion acquisition of EMC in 2016, which included VMware.

According to Dell’s SEC filing, if the spin-off is approved, VMware will pay a special dividend to shareholders like Dell Technologies. Dell is seeking to get VMware’s board of directors, which includes chairman Michael Dell, to agree to pay the cash dividend to all the company’s shareholders.

“Dell Technologies expects that in any such discussions, it would seek to negotiate the payment of a special cash dividend by VMware, which would be paid substantially concurrently with the Spin-off on a pro rata basis to all VMware stockholders. In the event VMware were to pay such a dividend, Dell Technologies expects that VMware would fund such dividend in part through the incurrence of new indebtedness,” said Dell Technologies in its filing with the U.S. SEC. “Dell Technologies expects that, in such event, it would use its pro rata portion of the proceeds from any such special cash dividend to repay outstanding debt of Dell Technologies and for general corporate purposes.”

Two of Dell Technologies’ biggest and longest investors, Silver Lake Partners and Elliott Management, have already reportedly voiced their support for the spin-off, according to a report by CNBC. Silver Lake has been a key ally to both Dell Technologies and Michael Dell for years. The private equity firmed played a key role in helping to take Dell private in 2013, while Silver Lake co-CEO Egon Durban is a member of the Dell Technologies board of directors.

In terms of time frame, Dell confirmed it would not spin off its shares of VMware before September 2021 for tax reasons. Dell is seeking to get the deal to qualify as tax-free for federal income tax purposes.

“It’s a shrewd business move. Michael Dell looks to be maximizing the value for everybody,” said Kerravala. “For a guy who started Dell in his dorm room, he’s really a sharp business guy. His longevity is really unparallel in his industry. You see CEO’s come and go, even John Chambers had his moment which lasted 20 years, but Michael Dell has really had some great longevity. You’re seeing why with moves like this.”