Here's what a Dell-VMware combination could look like

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(Bloomberg) -- There are several ways for Dell Technologies Inc. to return to the public stock market and cut its $48.5 billion debt load, according to analysts.

The Round Rock, Texas-based company can orchestrate a reverse merger with VMware Inc., list itself through an initial public offering, or buy the remaining VMware shares it doesn’t already own. Dell is set to discuss its next moves at a board meeting later this month.

“We would expect as part of this transaction the combined company would need to sell shares -- how much we currently do not know -- to gain cash to pay down debt,” Mark Moerdler, an analyst at Sanford C. Bernstein & Co., said in a note Monday. “The combined company would be predominantly a hardware company with negative operating income and huge debt.”

The suggestion that such a struggling business would be attached to VMware’s profitable software operations sent VMware stock tumbling more than 16 percent on Monday.

Here’s how each option might work:

Reverse Merger

Dell is the larger of the two companies, but VMware could be the acquirer. That would make Dell a public company without an IPO. The smaller software maker may sell more of its own shares to help pay $16 billion for Dell in such a scenario, after paying down debt and offering a 20 percent premium, according to Ilya Kundozerov, an equity analyst at Morningstar Investment Service.

That would dilute existing VMware shareholders, but Dell could ease the deal’s path because it controls 98 percent of VMware’s voting rights.

Still, VMware may have trouble taking on Dell’s huge debt. “They have about $3.5 billion in cash flow, so they would not be able to pay down the debt that fast,” Ivan Feinseth, chief investment officer of Tigress Financial Partners LLC, said in an interview.


Another option: Dell sells stock in an IPO without changing its relationship to VMware. An independent Dell would be less valuable than if it combined with the software provider before going public, and that offering would raise far less cash to pay off debt.

"I don’t think they could make $15 billion,” Feinseth said. “The value of Dell has dropped recently.”

Buying VMware

If Dell bought the rest of VMware it doesn’t already own, the deal could be worth $12.1 billion to $12.6 billion, Barclays analysts estimated in a recent note. The combined entity could then go public, which would raise some of the cash Dell needs to pay down debt. Feinseth reckons a listing like this could raise $30 billion.

However, buying all of VMware “would lead to additional debt for Dell and hence may not be a viable option if the company is trying to decrease its debt burden," the Barclays analysts warned.

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