Dell Technologies (DELL) - Get Report shares surged Wednesday amid reports that the tech group is planning to spin-off its cloud computing division VMware Inc. (VMW) - Get Report in a deal that could be worth $55 billion.
Dell, which owns 81% of VMware, is looking to either sell the holding to exiting Dell shareholders, or buy the remaining stake in the group that it doesn't already own. The Wall Street Journal first reported the potential spin-off late Tuesday.
Dell created a tracking stock in VMware shares, designed to help finance its $67 billion September 2016 purchase of parent EMC Corp, that was eventually bought out and exchanged for stand-alone shares in December 2018.
Dell shares were marked 8% higher Wednesday at $52.89 each. VMware shares , meanwhile, were seen 4.5% higher at $156.06 each, pegging its market value at around $67 billion, well ahead of the $43 billion currently priced in for Dell.
Dell's ability to buy VMware outright, however, could be complicated by its $57 billion debt pile and the edge-of-junk status credit rating it carries with both Standard & Poor's and Moody's Investors Service.
Still, analysts think a purchase of the VMware shares Dell doesn't own may be the best option, given that a near-term spinoff would trigger a big tax bill and the sale of its existing holding to private equity firms would have a limited set of potential buyers, given the $55 billion price tag.
"From a VMW perspective, we believe Dell buying in VMware makes the most strategic sense given its close knit product and go to market ties harkening back to Dell’s purchase of EMC," said Credit Suisse analyst Mathew Cabral.
"We do recognize the potential channel conflicts VMware might face with other infrastructure partners, specifically AWS, if Dell controlled the strategic destiny of the company," he added. "However, we would expect VMware to take a leading role in shaping the company’s stance on competition given its large opportunity, as well as its growth and profitability characteristics vs. the rest of the business."