This computer company is getting ready for a big spin-off which should boost its shares.
Dell Technologies Inc. (DELL)
From The Stock Spin-off Investing Newsletter
Dell Technologies announced last Wednesday that it plans to proceed with the spinoff of its 81% ownership of enterprise software maker, VMware, which it intends to complete in the fourth quarter of 2021. The announcement should not come as a surprise as the company said in July it was exploring a spin-off of its 81% stake in VMware in order to unlock value for shareholders. After the deal is set to close in Q4 2021, Dell CEO Michael Dell will remain chairman of the VMware board.
Under the terms of the spinoff, VMware will distribute a special cash dividend of $11.5-12B to all VMware shareholders. This special cash dividend also includes Dell, which will receive $9.3-9.7B that it will use to pay down debt to position the company for investment grade ratings.
“By spinning off VMware, we expect to drive additional growth opportunities for Dell Technologies as well as VMware, and unlock significant value for stakeholders,” says Michael Dell. “Both companies will remain important partners, providing Dell Technologies with a differentiated advantage in how we bring solutions to customers. At the same time, Dell Technologies will continue to modernize its core infrastructure and PC businesses and embrace new opportunities through an open ecosystem to grow in hybrid and private cloud, edge and telecom.”
I’ve updated my sum-of-the-parts model and think Dell is conservatively worth $118, implying ~16% upside. This valuation assumes Dell trades at 6.0x EBITDA and 4.8x FCF. This is probably too conservative.
Richard Howe, CFA, The Stock Spin-off Investing Newsletter, stockspinoffinvesting.com, 617-750-7454, April 26, 2021