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Dell CEO Michael Dell speaks during an interview with CNBC on the floor of the New York Stock Exchange (NYSE) in New York, U.S., July 2, 2018.
NEW YORK - Michael Dell is making his company more user-friendly - and listing it again. Dell Technologies is buying back shares that were supposed to mirror VMware’s for a total of $21.7 billion in cash and Dell common stock. It’s a sensible simplification that checks several boxes.
Dell owns more than 80 percent of virtualization-software outfit VMware. The stake came with its 67 billion acquisition of EMC in 2016. To help pay for EMC, Dell issued a so-called tracking stock, intended to match the economics of VMware’s still-listed common shares. But the tracking shares traded at a big discount to VMware’s actual stock - a shortfall of more than 40 percent on Friday.
That left a value gap of around $12 billion, ripe for exploitation by both Dell and the holders of the tracking stock – a group including activist investor Elliott Management. Monday’s deal only splits the difference, but it’s still a 29 percent premium to Friday’s closing price. That ought to keep holders of tracking stock happy and forestall future squabbles with activists – while leaving benefit for Dell, too.
The heavily indebted Dell has also tapped into VMware’s cash pile. The listed subsidiary will pay an $11 billion dividend. Dell’s $9 billion slug of that will help fund the purchase of the tracking stock. VMware’s other shareholders will get the payout too.
One way this deal makes things simpler is that Dell’s multiple classes of stock will all now represent the entirety of its business, comprising its core PC and server operations plus stakes in public companies including VMware. The streamlining makes Dell an easier sell to public-market investors. The company says it will list the share class it’s giving to the tracking stock holders after the deal.
Lastly, there’s a boost for private-equity investor Silver Lake Partners, which helped Michael Dell take his company private in 2013. The firm says it isn’t seeking an exit for now, but a listing gives it more options. Moreover, the stock Dell is using is valued at nearly $80 a share in this deal. Dell sold common stock at $27.50 to fund its purchase of EMC two years ago. At least on paper, it’s a handy return.
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CONTEXT NEWS
- Dell Technologies said on July 2 it would buy back tracking stock it issued to mirror the performance of VMware in a cash and stock deal, taking a step closer to a full return to the public market and ending a months-long review of its business.
- Dell, which owns around 80 percent of VMware, issued the tracking stock, with ticker DVMT, in 2016 to help fund its purchase of data-storage firm EMC. The tracking stock, designed to have economic exposure equivalent to owning VMware stock directly, has traded at a wide discount to the Dell subsidiary’s common shares – a shortfall of more than 40 percent on June 29.
- The elimination of the tracking stock is aimed at simplifying Dell's complex ownership structure without overburdening its balance sheet, which bears more than $50 billion in total debt.
- Dell is offering a premium of 29 percent to the June 29 closing price of DVMT shares, a total value of $21.7 billion of which up to $9 billion will be paid in cash and the rest in Dell’s Class C stock. The company said it would list its Class C shares on the New York Stock Exchange following the completion of the deal.
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(Editing by John Foley and Martin Langfield)
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