Dell Might Buy Back $3B of Tracking Stock

But it also needs cash to delever the company after the $67 billion acquisition of EMC.
Katie Kuehner-HebertDecember 15, 2015

Dell on Monday said that it might opt to buy back at least $3 billion in a new VMware tracking stock, the special class of shares the computer maker plans to issue to help finance its acquisition of storage company EMC.

According to Reuters, the disclosure might help boost the value of VMware, a software maker majority-owned by EMC. VMware’s common shares have lost a quarter of their value since the acquisition of EMC by Dell was announced in October. The drop has been attributed to the announcement of plans to issue a tracking stock.

Under the terms of the $67 billion deal, EMC shareholders would receive 0.111 VMware tracking share for each EMC share, a move intended to give investors exposure to VMware, which is growing faster than EMC.

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Dell spokesman David Frank told Reuters that the announcement was to give the company options. “It basically gives management flexibility, but the use of cash is largely going to be used to run the business and delever the company.”

Dell’s first choice would be to focus on paying down debt and not buying back VMware tracking shares after the merger, Frank said.

Under its current plans to finance the EMC deal, Dell would incur $49.5 billion in debt. Dell hopes to reduce its debt load in the first 18 to 24 months to achieve an investment-grade rating.

Separately, The Wall Street Journal speculated how the computer maker plans to pay off the massive debt it must take on to buy EMC. Dell has less cash on hand after paying off $4.5 billion in debt over the past two years, and the move to private management hasn’t boosted profit. During Dell’s fiscal 2015, the company’s operating profit totaled $3.2 billion excluding charges. In 2013, that figure was $4 billion.

“These numbers reinforce that it is going to be a highly leveraged transaction,” Sanford C. Bernstein analyst Toni Sacconaghi told the WSJ. He believes that Dell will incur debt of about $51 billion to conclude the deal.

Dell is spinning off its SecureWorks division with an initial public offering, and contemplating roughly $10 billion in further divestitures that could include its IT services business. Other possible spin-offs include the operations of previous Dell acquisitions Boomi, Quest Software, and SonicWall.