Hedge fund Elliott Management has called for sweeping changes at Scottish energy group SSE, which also operates in Ireland, including the appointment of two new independent directors, in a searing attack on SSE’s energy transition strategy.
In a 10-page letter to SSE chair Sir John Manzoni, published on Tuesday, the US activist fund criticised the performance of longstanding chief executive Alistair Phillips-Davies and described a set of reforms to better fund the renewables business as a “missed opportunity”.
The letter is Elliott’s first public comment on SSE’s strategy since it acquired a stake in the business this year and began to privately lobby management to split the electricity networks and renewables divisions into two separate listed companies.
Campaign
The SSE campaign marks the second big FTSE 100 company that the hedge fund has targeted this year, after attempting a shake-up at UK healthcare group GlaxoSmithKline.
Energy companies across the sector are wrestling with how to fund the investments in renewable infrastructure needed to overhaul the global energy system and cut carbon emissions.
SSE, which was one of the sponsors of November’s COP26 climate summit in Glasgow, has the largest renewable electricity portfolio in the UK. It also owns the main electricity grid in the north of Scotland, local networks in areas of England such as Oxfordshire and other assets including gas-fired power stations.
“SSE owns one of the most attractive portfolios of renewables and networks assets” in the UK, but its shares traded at roughly a 30 per cent discount to the value of those businesses, Elliott said in the letter. SSE has a current market value of $17 billion (€15 billion ) .
“The market’s failure to ascribe fair value to SSE and its portfolio is directly attributable to the company’s inefficient conglomerate structure and confusing equity story,” it said. “Renewables and networks are intrinsically different businesses, supported by divergent shareholder registers, with individual funding needs, growth profiles and strategic priorities.”
Shareholder
Elliott’s stake in SSE was first reported in September. The hedge fund said in the letter that it was a top-five shareholder and that it had shared its views with SSE management over “several months”.
Nevertheless, SSE chose in November to reject a spin-off in favour of boosting investment in renewables by selling a 25 per cent stake in its electricity networks business and cutting the dividend.
SSE told investors at the time that a spin-off or sale of the renewables business would increase costs and make it more difficult to fund large projects such as a 3.6 gigawatt wind farm it is building off the north-east coast of England.
Elliott described the arguments as “perfunctory” and the proposals as lacking “ambition”. It added that there had been a “history of underperformance” during Phillips-Davies’ eight-year tenure.
SSE’s share price closed 4 per cent down on November 17 following the announcement.
Elliott also criticised the review process behind the new strategy decisions, which it described as “opaque” and “deeply flawed”.
“This raises questions about SSE’s corporate governance and about the board’s ability to oversee the renewables strategy despite the lack of renewables expertise among its non-executive directors,” it said.
In response, Elliott is calling for the appointment of two new independent directors with renewables experience and the creation of a committee of independent board members to lead a further review of SSE’s strategy.
That review should include consideration of the sale of a larger stake of the electricity networks business and the partial listing and possible sale of a stake in the renewables division, it said.
Confidence
“SSE must act expeditiously to restore investor confidence, lest the impairment in shareholder value become permanent,” Elliott said.
In a statement in response to the letter, Phillips-Davies said the company’s renewables strategy had been the result of “a rigorous process involving constructive engagement with shareholders” alongside “independent advice”, adding that the plans had been backed by rating agency Moody’s.
He said that “separation does not support the financing of our core growth businesses”, insisting “it is not the right outcome to maximise value for shareholders or our other stakeholders”. – Copyright The Financial Times Limited 2021
