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FBN Securities: Possibility Of Future Dell Takeout Adds Premium To VMware Shares

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FBN Securities: Possibility Of Future Dell Takeout Adds Premium To VMware Shares
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Dell Technologies Inc (NYSE: DVMT) announced Monday the conclusion of strategic review and an agreement to exchange Class V tracking stock for Dell Technologies Class C common stock or an optional cash election.

The Class C shares will be listed on the NYSE, making Dell a public company yet again.

The Analyst

Analyzing the implication of the announcement for VMware, Inc. (NYSE: VMW), FBN Securities analyst Shebly Seyrafi maintained an Outperform rating on the stock with a price target lifted from $160 to $180.

The Thesis

The transaction announced by Dell Technologies avoids a not-so-palatable reverse merger scenario and provides leeway for Dell to trade as a public company again, Seyrafi said in a Monday note. (See the analyst's track record here.)

A reverse merger would have saddled VMWare with more debt, disrupting its business, the analyst said. The $11-billion dividend VMware has opted to pay its shareholders, including $9 billion paid to Dell Technologies, has served to reduce its gross cash position to $1.63 billion, he said. 

VMWare's net cash position is reduced from a positive $8.34 billion to a negative $2.6 billion, Seyrafi said. 

"But we estimate that VMW will have a fiscal 2019 FCF of $3.34 billion, so we expect VMW to go back to a positive net cash position in late fiscal 2019," the analyst said. 

The development, apart from avoiding a reverse merger scenario, also raises the possibility of VMware being acquired by Dell in the future, in FBN's view, creating a "growing takeout premium" for VMWare, Seyrafi said. 

The Price Action

After jumping 10.24 percent to $162.02 Monday, VMWare shares were trading down 0.19 percent at $161.61 at the time of publication Tuesday.

Related Links:

The Dell, Dell Technologies And VMWare Family Tree

Despite A Pristine Q4, Stifel Downgrades VMWare On Overhang From Parent Dell Technologies 

Photo courtesy of VMWare. 

Latest Ratings for VMW

DateFirmActionFromTo
Oct 2018WedbushInitiates Coverage OnOutperform
Aug 2018JP MorganMaintainsOverweightOverweight
Aug 2018Maxim GroupMaintainsHoldHold

View More Analyst Ratings for VMW
View the Latest Analyst Ratings

Posted-In: FBN Securities Shebly SeyrafiAnalyst Color News Price Target Reiteration M&A Analyst Ratings Best of Benzinga

 

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