The activist investor Elliott Management has gone public with its criticism of SSE’s corporate structure and governance as it seeks to garner wider support for a shake-up at the energy group. Here are the key points from the hedge fund’s ten-page letter to the SSE chairman Sir John Manzoni.
• SSE undervalued as a group
Elliott says that SSE is undervalued because of its “inefficient conglomerate structure”, which combines its “best in class” wind farm business with electricity networks in one £17 billion group. “Despite SSE’s attractive renewable power generation and electricity transmission and distribution assets, the company trades at a significant multiple discount to its renewables peers and also suffers from deep, persistent share-price underperformance,” Elliott argues. It says that pure-play renewables groups such as Orsted achieve higher valuations, and that SSE’s true value is about £21 per share — about 30 per cent higher than today. Ideally, “SSE should list the entirety of its renewables business, creating two standalone FTSE 100 UK companies”.
• Strategy day “a missed opportunity”
SSE responded to Elliott on November 17 when it rejected calls to break itself up, saying a review had found that separate businesses would be less able to fund growth and that there would be significant “dis-synergies” in a break-up. It instead set out plans to increase investment in renewables, sell a 25 per cent stake in its networks business and cut its dividend. Elliott points to a share price fall of 4 per cent that day as evidence that “investors were left thoroughly frustrated”, and cites analysts at Bernstein Research who called it a ��missed opportunity”. Elliott argues that SSE “failed to provide any convincing explanation for why the company is not pursuing a listing of renewables”, and that supposed dis-synergies were “simply not credible”.
• Governance and management questioned
Elliott criticises the way in which SSE arrived at its conclusions, saying it presented “perfunctory” arguments against a break-up without “proper due diligence”. It cites Patrick Hosking’s The Times column highlighting that SSE refused to acknowledge any potential benefits of a break-up and that it had relied on its usual bankers for supposedly independent advice. Elliott says the “opaque review process raised serious questions about the legitimacy of the review and the adequacy of SSE’s corporate governance under which it was conducted”. Elliott also ratchets up scrutiny of SSE boss Alistair Phillips-Davies, saying that during his eight-year tenure, “SSE has underperformed the European Utilities index by 77 per cent”.
• Renewed calls for a restructure
If SSE won’t spin off its renewables business entirely, Elliott proposes that it should at least consider a partial listing. This would be “less value-creative than a full listing” but would “avoid the potential dis-synergies that have dissuaded management from pursuing a full listing”. Another option would be to sell a minority stake in the renewables business, while Elliott also wants SSE to sell a larger stake in its networks business.
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• New directors and review demanded
Elliott argues that SSE’s renewables business is undermined by its “inadequate board”. “SSE struggles to make a credible case that renewables is a priority when renewables experience is absent at the board level. In fact, not one of SSE’s independent board members has any meaningful operating experience in growing a large renewables business,” it says. It calls for the appointment of two new independent directors with renewables experience, and for them to join a new strategic review committee to explore “additional steps to create value for shareholders”.
