Dell Spins Off VMware Stake, Generating Up To $9.7 Billion To Pay Down Debt

Dell Technologies Inc said on Wednesday it would spin off its 81% stake in cloud computing software maker VMware to shareholders, in a move that will help the PC maker reduce its debt.

VMware is currently Dell’s best-performing unit and has benefited from companies looking to cut costs and move to the cloud, a shift that has been accelerated by the COVID-19 pandemic.

Shares of Dell rose more than 8% in extended trading.

As part of a transaction that is expected to be tax-free, VMware will distribute a special cash dividend of between $11.5 billion and $12 billion to all its shareholders, including Dell, which will receive between $9.3 billion and $9.7 billion.

VMware interim Chief Executive Officer Zane Rowe told Reuters in an interview that VMware will use between $2.5 billion and $3 billion of cash from its balance sheet to pay the dividend and fund the rest with debt. Rowe said VMware expects to have an investment-grade credit rating after the transaction.

The special dividend will help Dell reduce its long-term debt of $41.62 billion, much of which was taken on during its $67 billion acquisition of VMWare’s then-majority owner EMC in 2016.

The companies said the deal will simplify their capital structures. Both will also enter a commercial arrangement to continue to align sales activities and develop solutions jointly. Under the agreement, executives at both companies will have compensation tied to the success of the partnership, Rowe told Reuters.

The spinoff could also allow VMware to strike more partnerships with major cloud computing providers, one of Dell’s primary technology competitors.

“This will clearly give us a lot of flexibility strategically to do more partnerships,” Rowe said.

VMware, whose software helps companies squeeze more work from data center servers, has been looking for a chief executive officer after previous boss Pat Gelsinger was tapped to lead Intel Corp. Rowe said the company had no updates on the CEO search.

The spinoff plans were originally announced by Dell in July last year. The deal is expected to close in the fourth quarter.

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