Bernstein Downgrades EMC As Dell/Denali Deal Nears Completion

With the EMC Corporation (NYSE: EMC) and Dell deal expected to close by October, Bernstein’s A.M. (Toni) Sacconaghi, Jr. believes that EMC’s risk/reward is balanced at the current trading levels.

Sacconaghi downgraded the rating on EMC from Outperform to Market Perform, with a price target of $28.

Impact Of The Deal

“Following the announcement that EMC was being acquired by Dell/Denali in October 2015, VMware, Inc. (NYSE: VMW) shares plummeted and the implied deal discount widened, pressuring EMC's stock,” the analyst mentioned.

However, VMware’s stock has now rebounded to close to its price before the deal announcement, while the deal spread has narrowed to 13 percent.

According to the Bernstein report, “Dell/Denali offered $24.05 per share + 0.111 shares of VMW tracking stock to EMC shareholders.”

Although the deal had initially been favorable regarding and EMC’s shares saw a strong move, with investors understanding the tracking stock shareholders’ rights better, shareholders of VMware’s public float became increasingly concerned.

Related Link: VMware's New Class V Stock Examined By Bernstein

VMware’s shares weakened, while the credit markets tightening and the share declined further, leading to the deal spread widening and a solid reversion in EMC’s shares.

Class V Versus VMware Stock

“A key question is how big a discount should be ascribed to Class V tracking stock relative to VMW's public shares. We believe that there are legitimate risks to owning Class V shares over VMW common stock and that these disadvantages justify a discount, potentially of 10–30 percent,” Sacconaghi stated.

However, the analyst also pointed out that there were several incremental risks to owning Class V shares, rather than VMware common stock, such as lack of shareholder representation and the addition of Denali credit risk.

“Assuming a 10–30 percent tracking stock discount, the Denali/EMC deal spread narrows to 5–11 percent. While this spread may seem attractive for a transaction that has been approved by most regulators and shareholders, has financing lined up, and is expected to close before October 31, we believe an investment in EMC today is not without risk,” the analyst added.

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