(Bloomberg) -- Quick, it’s nine hours after Michael Dell said he’d buy the VMware tracking stock for $109 apiece. Where are the shares trading? Nowhere near $109, and it’s a situation that analysts and investors worry may linger.
While rallying nicely, shares of the almost-two-year-old security remain $17 below the implied value in today’s announcement, potentially a sign of market skepticism toward the Dell stock being exchanged. Unlisted shares of Dell Technologies make up 60 percent of the deal’s consideration.
“Complexity is part of the issue here but I also struggle with Dell valuing its equity at $48 billion,” said David Weinstein, an analyst with Dana Investment Advisors. “It isn’t an unreasonable valuation, but it is far from conservative.”
The tracking stock, DVMT, rose 9 percent to close Monday at $92.20, 15 percent below the offer price. Five analysts and investors in a straw poll conducted Monday said they expected the shares to continue to trade at a steep discount due to assumptions about the equity value of Dell.
Calculating those assumptions is an imprecise science. But since about 40 percent of the consideration for the VMware tracker is coming in cash at the $109 price, the refusal of the shares to go anywhere near that level is a sign the market views the nonpublic Dell stock being exchanged as worth less.
"With DVMT shares presently trading in the low $90s -- irrespective of what spread one puts on the deal for the risk of the shareholders voting it down -- it seems the market is not placing a strong valuation on the new Dell Technologies shares at this time,” said Brett Buckley, event driven strategist at WallachBeth Capital LLC.
Phone calls and an email to Dave Farmer, a spokesman for Dell, were not immediately returned.
FBN Securities analyst Keith Moore called the terms of the long-awaited capital restructuring at Dell a “major disappointment” for holders of the tracking stock. Dell is “funneling” cash from VMware through a dividend to finance the purchase of DVMT shares and by doing this, Dell has increased the value of VMware without the tracking stock seeing the benefits, Moore said.
“We expect to see a number of DVMT shareholders come out against the terms of the deal for DVMT shareholders and expect there is a high probability that activists will surface seeking improved terms,” Moore said in a note to clients.
Carl Icahn, who holds a sizable position in VMware and the tracking stock, is studying the proposal to determine whether he’ll support it, according to a person familiar with the matter.
Bloomberg Intelligence analyst Anand Srinivasan said that the new company to be listed on the New York Stock Exchange would be a “hardware-heavy entity with only an indirect, partial connection to the higher-margin VMware software unit.” As a result, its multiple will probably be “substantially lower” than VMware.
The spread between the two stocks may also be inflated by arbitrage funds who are short the software company and long the tracking stock to capitalize on the discount. Short interest accounted for about 19 percent of VMware’s float as of July 2, down from 49 percent in September, according to financial analytics firm S3 Partners.
“This is a sell the news event that many funds had on,” said Michael Samuels, an event-driven portfolio manager for Broome Street Capital. “Funds aren’t exactly agreeing with the valuation Michael Dell is placing on Dell. I think this could be an opening salvo, and it’s possible the activist funds involved such as Icahn or Elliott push for better terms.”
Shares of VMware climbed 10 percent to $162.02 in New York.
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