Tracking Stock for VMware Slides Ahead of Dell's Return to Public Market

By Micah Maidenberg

The stock that tracks Dell Technologies Inc.'s interest in software firm VMware Inc. traded down sharply Monday after a window passed for shareholders to elect to get cash in connection with Dell's plan to buy them out.

The steep fall was largely expected, according to some market participants, as the stock can now only be exchanged for shares in the soon-to-be-public Dell.

Class V shares -- trading under the symbol DVMT -- closed at $80.50 Monday, down 22% from Friday. According to the deal's exchange ratio, the implied value of Dell shares would be $44.56, compared with Friday's implied price of $43.38, according to data the company has released.

However, the stock trading at a slight premium to its implied price potentially shows some investors believe newly issued shares in Dell may be worth more than a value Dell has assigned to them.

Earlier this month, Class V shareholders approved a transaction that allowed them to trade their shares for up to $14 billion in cash and receive between 1.5043 and 1.8130 shares in Dell. The company sweetened the deal to win approval after facing pressure from shareholders, boosting the cash component from an initial offer of $12 billion.

The deal specified the exchange ratio would reflect the amount of cash shareholders said they wanted and the average trading price of the Class V stock over a 17-day trading period that ended Friday. Dell said the final exchange ratio was 1.8066.

Shares in the personal-computer maker and data-storage company are scheduled to begin trading on the New York Stock Exchange on Friday under the ticker symbol DELL.

The only shares that traded Monday were those remaining from investors who chose not to make an election of cash or stock in the forthcoming publicly traded Dell.

For most of Monday's abridged session, the Class V shares traded at a discount to their implied value.

Some investors may have had concerns about the amount of debt Dell has on its books, said Daniel Ives, Wedbush Securities managing director.

Dell said in a securities filing on Friday that it increased the size of one of its senior credit lines by $1.17 billion and obtained new loans worth $1.65 billion and $5 billion.

Dell will use some of the loan proceeds to fund its portion of a special cash dividend that VMware will pay to shareholders.

Dell plans to pay down at least $4.8 billion next year in debt using cash on hand, cash generated from operations and an existing credit line, executives told analysts on a conference call Friday.

The company's adjusted free cash flow over a trailing 12-month period was $4.4 billion, excluding VMWare. Dell, which owns a majority stake in the software maker, generated $7.7 billion in free cash flow over the last twelve months when it includes VMware's contribution.

The company is well positioned to handle its debt load, Dell finance chief Thomas Sweet said on the call.

"So I think we feel good about our ability to generate cash flow appropriately given the size of the company and the size of the balance sheet to take care of our debt service needs," Mr. Sweet said.

Write to Micah Maidenberg at micah.maidenberg@wsj.com

(END) Dow Jones Newswires

December 24, 2018 16:24 ET (21:24 GMT)

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