Dell Stock Looks To Shed ‘Conglomerate Discount’ With Divestitures



Fresh from announcing a spinoff of VMware (VMW), Dell Technologies (DELL) is getting applause from Wall Street as it reportedly looks to divest another business to unlock value in its assets. Dell stock rose sharply on Thursday.


Dell stock received a flurry of price-target hikes from Wall Street analysts after the VMware spinoff news. Then, Bloomberg reported late Wednesday that Dell also wants to sell its cloud business Boomi as part of the strategy.

The divestiture activity is geared toward freeing Dell assets from what Raymond James analyst Simon Leopold called a “conglomerate discount,” or entities that are devalued by being part of a large conglomerate. Leopold reiterated his outperform rating on Dell stock and raised his price target to 113 from 92.

“The spinout unlocks trapped value,” Leopold said in a note to clients.

In afternoon trading on the stock market today, Dell stock jumped 7.1%, near 99.30. Earlier in the session, Dell stock notched a record high of 101.22. VMware stock rose 3.8%, near 161.40.

Dell Stock: Paring Down Debt Load

Late Wednesday, Dell said it will receive about $9.3 billion to $9.7 billion from VMware as part of its agreement to divest its 80.6% stake in the virtualization software maker. Round Rock, Texas-based Dell plans to use the proceeds to pare down its debt load.

Dell exited its fiscal fourth quarter ended Jan. 29 with $48.5 billion in debt. Of that, it listed $29.2 billion as “core debt.”

The company took on a massive debt load when it bought EMC in 2016 for $67 billion in cash and stock. Dell funded that deal with $45.9 billion in new debt.

Morgan Stanley analyst Katy Huberty said the VMware spinoff “unlocks significant value for Dell shareholders.”

She added, “Dell shares historically traded at a discount to sum-of-the-parts valuation due in large part to the discount the market applied to Dell’s subsidiary ownership stakes, most notably VMware.”

Also, the cash payment from VMware should “accelerate Dell’s path to an investment grade credit rating,” Huberty said.

Huberty reiterated her overweight, or buy, rating on Dell stock. She also raised her price target to 117 from 107.

Boomi Sale Could Be Next

Dell stockholders will receive a pro rata distribution of VMware shares held by Dell Technologies. The companies expect the transaction to close in the fourth quarter.

Meanwhile, Dell is working with a financial advisor on a possible divestiture of Boomi, which could be valued at up to $3 billion, Bloomberg said. The computer hardware and services firm is looking to reduce its debt and clean up its balance sheet.

Last year, Dell sold cybersecurity unit RSA for $2.08 billion to a private equity firm.

Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.


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