Dell Analysts Say Potential VMWare Spinoff Would Unlock Shareholder Value

PC maker Dell Technologies Inc DELL confirmed speculation Wednesday regarding plans to spinoff VMware, Inc. VMW, in which it holds an 81% stake, sending Dell shares higher.

What Happened: Dell said the spinoff could benefit shareholders of both companies, team members, customers and partners by simplifying capital structures and adding long-term enterprise value.

The spin off, if it materializes, wouldn't occur before September 2021, the company said.

Apart from a potential spinoff, the company said it is evaluating a range of strategic options, including maintaining its stake in the company.

Potential Spinoff Builds On Strengthening Fundamentals, Morgan Stanley Says: The chance of the spinoff materializing is greater than 50%, Morgan Stanley analyst Katy Huberty said in a note.

The analyst said she expects the VMware spinoff to be accompanied by a substantial cash dividend, allowing Dell to achieve an investment grade credit rating more quickly.

The sale of Pivotal and RSA, along with the potential VMware spinoff, simplifies Dell's ownership structure, rendering its valuation attractive, she said. 

Dell is poised to grow faster than peers as the PC market benefits from more remote work and its new mid-range storage platform help accelerate share gains, Huberty said. 

"Net, we believe Dell has the potential to outperform its enterprise hardware peers fundamentally while enjoying multiple expansion in a VMW spin scenario."

Huberty Dell from Equal-weight to Overweight and increased the price target from $50 to $68.

See also: This Day In Market History: The Dell IPO

Spinoff The Logical Course of Action, BofA Says: The core Dell valuation is at a substantial discount to peers, BofA Securities analyst Wamsi Mohan said. Historically, without a transaction, the value of the stub often takes a long time to accrete higher, the analyst said. 

"We think such a transaction, if it were to go through, could help unlock the value of core-Dell, which continues to trade at a low multiple, while as a separate company." 

The analyst also sees the option as helping VMware pursue its own strategy for growth.

BofA reiterated its Buy rating on Dell shares andd raised the price target from $60 to $70.

At last check, Dell shares were jumping 13.97% to $60.04and VMware shares were up 1.8% at $142.21. 

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