As Dell Technologies publicly confirmed that it was exploring a number of potential transactions — ranging from an initial public offering to a combination with VMware, of which it owns 80 percent — much of the media coverage has focused on why it’s doing so.
One theory has been the company’s debt, of which there is a lot (particularly after its $67 billion takeover of data storage company EMC in 2016). A combination with VMware could help provide a way for Dell to manage its balance sheet, through both additional earnings power and the ability to raise money through stock sales.
But a closer look at Dell’s financials suggests that the company doesn’t have to strike a deal solely to manage its debt.
Dell has a total of roughly $52.5 billion in gross debt. But company executives have explained to debt investors that such a number doesn’t factor in a number of mitigating circumstances:
■ About $4 billion of that is investment-grade long-term debt that sits at VMware.
■ About $6 billion is held by Dell Financial Services, which is backed by computer equipment and, Dell has argued, shouldn’t be lumped in with general corporate bonds or loans.
■ Then there’s a $2 billion margin loan, which is backed by $8 billion worth of VMware stock.
That leaves us with what Dell internally calls $40.3 billion in net debt.
Then let’s consider:
■ Dell had about $11.7 billion in cash and equivalents at the end of its third fiscal quarter, which ended Nov. 3.
■ VMware also had about $6 billion in cash then.
■ The company has been narrowing its operating losses over the past year, and its cash from operations in its third quarter was $1.6 billion. On an annualized basis, it’s on track to generate some $8 billion worth of cash from operations.
■ The company has also paid off billions of dollars of debt since its takeover of EMC.
■ Roughly three-quarters of Dell’s overall debt, or $31 billion, is rated investment grade.
One query that has arisen is how much Dell’s debt interest payments will hit its bottom line under the tax overhaul, which limits their deductibility. The company pays roughly $2 billion a year in interest right now, which under the old law it was able to deduct.
The final version of the tax overhaul eliminated more onerous proposals. And Dell officials have said privately that they are heartened by both a lower overall corporate tax rate and the ability to fully expense capital investments immediately. It’s unclear whether the company over all considers the new tax law a net positive or negative.
In a Sept. 20 research note, Moody’s Investors Service pointed out that it has rated Dell’s long-term debt over all at Ba1, or highly rated junk grade. And the ratings agency said that while the company had a big amount of debt, it was both manageable and appeared to be headed down.
“We expect Dell to remain committed to sizable debt reduction following the EMC merger based on the company’s track record following the L.B.O. in October 2013,” the Moody’s analysts wrote.
There’s no getting around it: Dell has a lot of debt, and pays a significant amount in interest payments. But it’s not necessarily an existential threat.
Of course, Dell has other reasons to pursue strategic options, such as a return to the public markets through either an I.P.O. or a reverse merger with VMware. Going public in some fashion could help Michael Dell or his partners at Silver Lake eventually cash out of their holdings, for instance.
A representative for Dell declined to comment.