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The Dell Technologies tracking stock for VMware is rallying Wednesday amid reports that the company is near a deal to sweeten its current $21.7 billion offer for the tracking stock to a range of $120 to $130 a share.
The tracking stock,
Dell Technologies Clbad V
(ticker: DVMT), is up $3.08 to $104.65 after hitting a record $105.25 earlier Wednesday. The stock gained 3% Tuesday in response to a Reuters article, citing unidentified sources, that Dell was talking to bankers about boosting the cash portion of the offer, and that the talks with tracker holders were “focused on a valuation of between $120 and $130 a share.” Shares of
VMware
(VMW) also are higher Wednesday, gaining $0.34 to $150.85.
The Wall Street Journal is reporting Wednesday afternoon, citing unidentified sources, that under a new potential deal, Dell would offer about 50% more cash in the transaction than the $9 billion in the current agreement, which was reached in July and provoked significant shareholder resistance.
The original cash and stock deal had a headline value of $109 a share, but was valued in the stock market at around $95 because investors put a lower value on Dell’s equity than the company badumed.
Dell, which is now private and owned by Michael Dell and Silver Lake Partners, would go public in conjunction with a buyout of the tracker investors. Dell isn’t commenting on the talk of a higher bid.
At around $104, the tracker still trades at a material discount to the reported $120-$130 price range of a potential deal, reflecting uncertainty about whether an agreement can be reached and whether it will gain tracker shareholder approval.
Read more: Dell Has Hard Sell With Planned Buyout of Tracking Stock
There’s speculation that Dell is seeking to line up public support from some key tracking-stock shareholders for its improved offer, given that it may be difficult to win over the largest holder, Carl Icahn, who has a 9.35% stake. Icahn is pushing for Dell to pay the tracker holders parity with VMware, or about $150 a share. Icahn declined to comment.
The talk is that Dell has been trying to win over Dodge & Cox, the No. 3 holder of the tracking stock, with a stake of nearly 8%. The San Francisco investment firm had no immediate comment. Index fund giant Vanguard is the No. 2 holder, at almost 9%.
If Dell can win over Dodge & Cox and some other big holders, it may be enough to win sufficient support to carry the day.
There’s speculation that the new deal could have a headline price of around $130, with a 50-50 split of cash and stock. That would mean an additional $4 billion of cash relative to the original offer. A key issue will be whether Dell uses the same valuation of around $80 a share on its equity that it did in the original offer. Investors effectively valued Dell equity at a lower price of $60 to $65 a share, based on where the tracking stock has traded.
Some tracker holders would like to see Dell provide some financial guarantee that its equity will trade at the stated value. There are several mechanisms that Dell could use to achieve this. That idea has been supported by tracker holder P. Schoenfeld Asset Management in letters to the Dell board. Schoenfeld opposed the $109 a share offer.
If the headline value of a recut deal is about $130 a share, but if the tracking stock trades for just $115 to $120 because of an overly aggressive valuation of Dell equity, it would be harder to get shareholder approval. A deal with a real value of $130 would fare much better, investors tell Barron’s.
While Icahn has pushed for parity with VMware in any Dell deal with tracker holders, other investors are willing to accept some discount. At $130, the discount would be around 13%, but at $120, it would be about 20%.
Another issue is whether Dell will provide a bonus to tracker holders if VMware stock appreciates in the wake of a recut deal. Some tracker investors think VMware has been depressed by uncertainty about the tracker situation. VMware shares could rally on any deal involving DVMT because it would reduce the chances of Dell seeking to disadvantage public VMware investors, who hold about 19% of the stock.
Corporate-governance issues are believed to have weighed on VMware stock. Dell controls 81% of VMware, and about 65% of that stake, or around 50% of the company, backs the tracking stock, which has 199 million shares outstanding.
Write to Andrew Bary at [email protected]
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