EMC affirms Dell deal terms, but market not convinced

January 28 23:40 2016

EMC CEO Joseph Tucci affirmed on a conference call Wednesday that the company’s pending sale to Dell will go ahead under the terms and time-frame announced in October. Those terms called for a cash portion of $24.05 a share and a tracking stock worth $9.10 in VMWare, in which EMC has a controlling stake, as well as a closing date between May and October. Yet the stock market’s reaction to Tucci’s comments suggests that tech investors are not buying that story — meaning they’re not buying EMC shares based on it.

EMC (EMC) shares closed down 1.7% Wednesday at $23.90, only slightly better than the Nasdaq Composite’s 2% drop. An updated look at the deal terms, which we’ve reported on here multiple times, shows why. When the transaction is completed, the new parent company of both EMC and Dell, named Denali, will issue one share of tracking stock for each VMware share (VMW) comprising EMC’s stake. Those 223 million planned Class V shares will mean a dilution haircut of 50% for VMWare ordinary shareholders.

As of the announcement, EMC owned 343 million shares of VMWare, or 81% of the total. Yet the new stock will track the performance of only 53% of Denali’s post-close economic interest in VMWare, according to EMC’s own documents. The other 28% will not be subject to the tracking stock, but instead “will be for the benefit of other Denali common stockholders.”

Those other investors include billionaire Michael Dell and his partners on this deal, the private equity firm Silver Lake Partners. At the cash price of $24.05 a share, EMC has a market cap of $46.65 billion. VMWare, meanwhile, has seen its shares get crushed about 40% from the selling pressure generated by this highly-dilutive deal. The shares fell 10% Wednesday on a disappointing 2016 forecast, and at $45 a share, VMWare is now valued at $19 billion. A tracking stock with a 53% interest in that business would be worth $10.1 billion.

Add that to EMC’s current value and the deal is now worth roughly $58 billion, or about $9 billion less than the announced value of $67 billion. These numbers make the implied value of the tracking stock about $4.52 a share (an economic interest in VMWare of $10.1 billion divided by those 223 million Class V shares.) Any additional discount that Wall Street traders place on the shares, given that they won’t have any voting rights as ordinary VMWare shares do, could reduce that share price another 5% to 10%.