VMware spinoff to help Dell cut its debt load of €40bn

Michael Dell said Dell and VMware will remain important partners following Dell's spinoff of its 81% stake in VMware.

Dell plans to start spinning off its huge 81% stake in VMware, the software producer that has a significant European presence in Cork, creating two publicly traded companies and raising cash to pay down debt. 

The spinoff will unwind, at least in part, a consolidation created five years ago in Dell’s $67bn acquisition of VMware’s parent, EMC. 

The spending spree helped Dell branch out from its origins as a personal computer maker, but left the company saddled with debt.

Dell has a five-year commercial agreement with VMware to continue to market and sell the software maker’s products; currently about 35% of VMware’s revenue comes through Dell’s sales force.

VMware will distribute a special cash dividend of up to $12bn (€10bn) to shareholders at the close of the deal, which is expected by the fourth quarter, Dell said. Dell, which owns 81% of VMware, will receive a payout of as much as $9.7bn (€8.1bn). 

“We expect to drive additional growth opportunities for Dell Technologies as well as VMware, and unlock significant value for stakeholders,” said Michael Dell, chairman and chief executive officer of his eponymous company. 

Both companies will remain important partners. 

The spinoff will provide Dell cash to live up to promises to investors to reduce its debt load, which was $48.5bn (€40.5bn) at the end of its most recent quarter. The company said “core debt” was $29.2bn (€24.4bn). 

VMware was founded in 1998 and acquired by EMC in 2004, which sold part of its stake in an initial public offering three years later. 

EMC’s holdings in the maker of data centre software passed to Dell when it acquired EMC in 2016 in the largest successful acquisition in the technology industry. 

In another effort to slim down the company, Dell is also exploring options including a potential sale of cloud business Boomi, according to sources.

Michael Dell and other executives faced questions from analysts about their decision to reverse the industry consolidation strategy relatively quickly. 

The executives emphasised the benefit to investors of the split and said the stock market hasn’t given the combined company the appropriate value.

“We think this is a move in the right direction for Dell and it helps unlock the sizable conglomerate discount that is currently embedded,” said Amit Daryanani, an analyst at Evercore ISI.

“The commercial agreement allows us to achieve the same things we had targeted with the acquisition of EMC,” Dell chief operating officer Jeff Clarke said in an interview.

• Bloomberg