(Reuters) -Dell Technologies Inc said on Wednesday it would spin off its 81% stake in cloud computing software maker VMware, in a move that will help the PC maker reduce its debt.
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, in the transaction that is expected to be tax-free.
The spinoff, first proposed in a filing last July, will help Dell lower its long-term debt of $41.62 billion, much of which was taken on during its 2016 acquisition of data management firm EMC. Dell hopes doing so will help it achieve an investment grade rating and simplify its capital structure.
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 jumped more than 8.4% in extended trading, while VMWare stock rose 1.5%.
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 move is long overdue. Great news to Dell shareholders as it unlocks the value that’s stuck in the VMWare ownership,” said Dan Ives, analyst at Wedbush Securities, adding that the dividend Dell expects to receive is 10% higher than the Street’s bull case.
Elliott Management Investment, one of Dell’s largest shareholders, said it strongly supports the spinoff in a statement.
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 new products 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 including Amazon and Microsoft, which are also 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 deal is expected to close in the fourth quarter.
(Reporting by Munsif Vengattil in Bengaluru, Stephen Nellis in San Francisco and Krystal Hu in New York; Editing by Anil D’Silva and Karishma Singh)