Dell Technologies Inc.
plans to sell its stake in software giant
will help his chief financial officer reduce the mountain of debt of the personal computer manufacturer.
The Round Rock, Texas-based company said on Wednesday that VMware pay a special dividend in cash from 11.5 to 12 billion dollars to the shareholders of the company, of which 9.3 to 9.7 billion dollars to Dell. Dell owns around 81% of VMware’s capital.
“This speeds up our corporate deleveraging plan,” CFO Tom Sweet said.
Dell Merger 2016 with EMC Corp. burdened the tech company with substantial debt. At the end of February, the company reported $ 33 billion in debt base – a separate amount of debt from its financial services division and that of its subsidiaries – for its most recent fiscal year.
Dell repaid $ 5.5 billion in basic debt in fiscal 2021 and initially planned to spend at least an additional $ 5 billion on debt reduction in that fiscal year. With the proceeds of the VMware transaction, Mr. Sweet is now increasing the amount he wants to reduce his debt by approximately $ 14.5 billion for the current fiscal year.
That would reduce the ratio of core debt to earnings before interest, taxes, depreciation and amortization to about twice, from 2.5 times at the end of fiscal 2021, Sweet said.
Debt reduction is not a goal in itself for Dell, but is seen as a step towards a premium credit rating. The company hasn’t owned any since 2013, when founder Michael Dell and private equity firm Silver Lake privatized the company. He returned to the public markets in December 2018.
Fitch Ratings Inc., Moody’s Investors Service and
Global S&P Inc.
currently rate Dell below the investment grade. “Given the size of the business, it’s important to get back to top-notch rating,” Sweet said, adding that Dell has regular conversations with rating agencies.
S&P said on Wednesday it had placed Dell on credit watch with positive implications, saying there was at least a 50% chance the company would raise its rating to investment grade once the VMware spin-off ends. “We believe Dell’s financial policy will support an investment grade rating,” S&P said. “In our view, reducing the absolute debt burden is also in the best interest of equity and debt investors given its high leverage relative to other hardware peers, which exposes Dell to pressure. ratings during industry downturns, ”S&P said.
Fitch also put Dell on positive watch and said he sees room for a higher credit score.
An investment grade would give the company more flexibility in allocating its capital and could allow it to spend money on shareholder returns such as dividends and share buybacks, Mr. Sweet. Dell does not currently pay any dividends to shareholders.
The company intends to repay two upcoming debt instruments of approximately $ 1.5 billion each as well as a $ 4 billion margin loan secured by Dell’s VMware shares, Sweet said.
The split is expected to end in the fourth quarter of calendar year 2021. Dell launched a process last year to review its stake in VMware that included the offloading of its stake.
“Paying off core debt has been a priority for Dell since the deal with EMC, and we’ve seen it with the Dell divestitures,” said Mark Cash, senior equity analyst at Morningstar Research Services LLC, a supplier of research.
Wednesday’s transaction allows the company to unlock additional value that has not been realized in the current capital structure, said Daniel Newman, founding partner of Futurum Research, a research firm.
Dell’s share price rose 8.25% after-hours trading to $ 100.35, according to FactSet.
Write to Nina Trentmann at [email protected]
Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8