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Announcement:

Moody's says the proposed elimination of Dell's Class V Tracking Stock will not impact Dell's or VMware's ratings

02 Jul 2018

New York, July 02, 2018 -- On July 2, Dell Technologies ("Dell") announced that its board of directors approved a transaction whereby each share of Dell's Class V Common Stock ("VMware tracking stock") would be exchanged for 1.3665 shares of Dell's Class C common stock, or at the holder's election, $109 in cash, with the aggregate amount of cash consideration not exceeding $9 billion. All of the shares of VMware tracking stock who do not choose cash will be converted into Class C common stock, and the VMware tracking stock will be eliminated. The $9 billion of cash consideration will be funded by a distribution from VMware, Inc. ("VMware"). VMware's board of directors approved an $11 billion cash dividend pro rata to all VMware stockholders and Dell Technologies' share of such dividend will be approximately $9 billion (collectively the "Transactions"). Pro forma for the transaction, the former tracking stock holders will own 21% to 31.0% of Dell Technologies, depending on cash election amounts, with Michael Dell and Silver Lake owning about 47% to 54% and 16% to 18%, respectively.

Dell expects to publicly register its common shares with the SEC with the stock to become publicly listed on the New York Stock Exchange. The Transactions are credit positive to Dell as it simplifies the capital structure and provides the company with access to the public equity markets. Nevertheless, Silver Lake's continuing ownership of Dell common stock as well as the potential for Dell to purchase all or a portion of the public float of VMware common equity at a future date create some risk of a leveraging event. Significant key man risk associated with Michael Dell's still controlling stake will also remain. There is no effect on Dell's Ba1 Corporate Family Rating or stable outlook.

Dell is highly leveraged, though we expect leverage to decline to about to about 4x (including 82% of VMware EBITDA and debt) over the next year through a combination of debt repayment, low single-digit revenue growth, and improving profit margins. Profitability should improve with the stabilization of the enterprise storage business, which last quarter showed its first quarterly revenue growth (year over year) since the merger, continued market share gains in the PC and server markets, and full realization of the company's targeted cost synergies of $2 billion. Moody's has indicated that Dell's ratings could be upgraded if the company were to show sustained annual revenue growth of at least mid-single digits, high single digit adjusted operating margins, and gross debt to EBITDA in the mid 2 times range. In addition, financial policies will need to be very conservative with the risk of a significant levering event considered remote.

The aggregate effect of the Transactions is credit neutral to VMware at this time and consequently VMware's Baa2 senior unsecured rating and stable outlook are not affected. After the Transactions, Dell will continue to control over 80% of VMware's shares and over 97% of its voting interest and will remain highly leveraged. However, the redemption of the VMware tracking stock and Dell's movement to public company ownership somewhat lessens the risks to VMware's credit profile from Dell's concentrated ownership stake. Dell can effectively control and direct VMware's board of directors and could prevent VMware from taking actions that might be in the subsidiary's best interest. There is continued risk that Dell could attempt to transfer further amounts of VMware cash upstream in the event that additional liquidity is required at the parent level. The cash distribution to its shareholders will substantially reduce VMWare's robust cash balances, which represented over 3 times its funded debt balance and was considered a credit strength. However, VMware will retain over $2 billion of cash pro forma for the Transactions and generate strong annual free cash flow of over $3 billion with the company projecting to be in a net cash position in less than one year. We expect the company to refrain from large acquisitions and share purchases as it rebuilds its cash position.

VMware's business profile is very strong and its performance has met expectations since we initially rated the company in August 2017. Debt to EBITDA is 2.3 times for the LTM period ended May 31, 2018 (or 2.0 times excluding the tax liability related to tax reform) and free cash flow to debt was over 50%.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Stephen Sohn
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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