KeyBanc: Why Tax Reform Could Drive Rumored Dell-VMware Deal

Dell is continuing to explore strategic alternatives including a potential IPO or some form of merger with the cloud computer name VMware, Inc. (NYSE: VMW), in which the PC-maker has an 82-percent stake.

Recent U.S. tax legislation could potentially be a key catalyst for the biggest tech deal ever between the two companies, according to KeyBanc Capital Markets. 

The Analyst 

KeyBanc analyst Alex Kurtz maintains an Overweight rating on VMWare with a $151 price target.

The Thesis

Over the past week, several reports have said Dell is assessing its options with VMWare. 

A Pivotal Software IPO is possible, while an eventual Dell IPO is "becoming more of a consensus view," Kurtz said. 

The tax legislation signed by President Donald Trump could slash the interest deduction Dell can claim on the cash flow deployed at the time of the EMC merger, the analyst said. 

As of the third quarter, Dell was carrying approximately $46 billion in debt, and the tax changes — which shift the deductibility of interest from full deduction of interest expenses to a cap of 30 percent of EBITDA — are estimated to add $200 million in tax expenses for the Palo Alto-basec company, according to KeyBanc. 

Although the possibility of a reverse merger has been reported, Kurtz said he considers a traditional IPO for Dell as the more logical approach, as this would create a capital infusion that could further accelerate debt repayment. 

KeyBanc Predicts Possible Outcomes 

• For investors who were long DVMT and short VMW for the tracking stock discount, Sept. 7 remains a key date for the potential change to this arbitrage position.
• Dell could puruse a short-form merger, in which a parent company that owns 80-90 percent of the subsidiary can limit minority shareholders, causing them to have limited or no voting rights.
• A reverse merger where Dell parent company Denali Holdings Inc. pursues VMW’s stock as a means to access the public markets.
• A traditional IPO for Dell.
• A Pivotal Software IPO to raise additional funds.
• Dell's board of directors are expected to meet later this month to discuss further options. 

Price Action

Vmware shares are down 5 percent on Tuesday. At last check trading at 119.59.

Dell Technologies Inc (NYSE: DVMT), which holds Dell assets, was down 5.78 percent at $70.47 late in Tuesday's trading session.

Related Links: 

Dell Reportedly Exploring Reverse Merger With VMWare, Potential IPO

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