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EImproving lliott Management’s open letters. When the US activist hedge fund tried to visit GlaxoSmithKline over the summer, it produced 17 pages of waffle that could be summed up in a few sentences. Tuesday’s 10-page explosion at energy group SSE was tighter, scoring some solid hits and should make the new chairman, Sir John Manzoni, realize that the Perth-based company is in trouble.
That’s not to say that Elliott is right on all counts, or even on his main claim that SSE should be split in two. In fact, one of the activist’s points was clearly exaggerated: the idea that an “unambiguous message” was being sent by the 4% drop in SSE’s stock price on the day of last month as the company unveiled its energy transition strategy, along with a deferred dividend cut.
Come on, the signal in the stock price – now down just 1.8% – is just not clear. Rather than being “thoroughly frustrated” as Elliott claims, SSE’s investors just seem uninspired. That, however, is hardly a triumph for a £17 billion FTSE 100 company at the time of its major strategic reset.
Manzoni could start by addressing Elliott’s legitimate criticism that SSE failed to show its arithmetic when it refused to split its renewables from its electricity transmission and distribution networks on the basis of cost. The financial detail was indeed missing. What are the £200 million in divorce costs and £95 million in “quantifiable dis-synergies”? Both numbers need explanation.
However, the core of SSE’s “better together” defense was heavier: it was the argument that it is cheaper to finance the construction of more renewable energy sources, mainly offshore wind farms, when the division is housed under the same roof as a grids and distribution division. who reliably throws away money.
SSE’s argument feels intuitively correct, as the size and diversity of revenues lead to lower borrowing costs over time. But it’s not one that’s universally accepted — three major continental European energy companies are considering doing the splits — so again, the evidence needs to be shown.
In its absence, Elliott’s refrain that a standalone renewables division would be inundated with offers of cheap capital from ESG-friendly investors will sound tantalizing. The hedge fund may be guilty of wishful thinking (the share price of Danish pin-up Orsted is down 35% this year, mind you), but SSE needs to take home its points, which means showing that you care with got to the heart of the matter.
Then there’s the composition of the SSE board, where Elliott’s case is strongest. Look at the list of non-executive directors and it’s not clear who the renewable energy specialists should be. There is ample expertise on major projects from directors whose executive lives have been spent at BP, Eon and National Grid, but the renewable energy experience is meager. That’s a problem if you’re trying to portray yourself as the British ‘clean energy champion’.
Manzoni’s smart move would be to grant Elliott’s wish for two new commissioners. It may even take some warmth from the chief executive, Alistair Phillips-Davies, who, after eight years in office, probably doesn’t plan on staying forever after all.
Ultimately, SSE should win this battle. It was extremely well connected in Westminster and Edinburgh even before Manzoni, a former Permanent Secretary to the Cabinet Office, arrived. It will not be easily bullied by an activist who, for all his noise and reputation, owns less than 5% of the share capital.
But a point-by-point response to Elliott is required. The activist may be wrong about the immediate need for a split, but SSE must be seen to convincingly win her case. The company plans to spend £12.5 billion on critical infrastructure over five years. Non-Elliott investors must be fully signed up.
The long-term mindset
It wasn’t a mea culpa from Lindsell Train’s Nick Train, one of the few fund managers that still enjoys a (deservedly) star status among private investors. Rather, it was an admission that today’s stock markets are tough. His funds are experiencing “perhaps the worst period of relative investment performance in our 20-year history.”
An underweight position in technology stocks – such as Tesla – is a major explanation, plus the lack of cyclical manufacturing stocks that have benefited from the Covid recovery. Train promises to stick to its proven long-term approach, which is exactly what its investors want to hear. But the markets are feeling increasingly erratic. The FTSE 100 index, which rose 100 points on Tuesday, appears to have decided that the Omicron variant is not much of a concern. A little premature, yes.
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Sources 2/ https://www.theguardian.com/business/nils-pratley-on-finance/2021/dec/07/sse-may-not-need-to-split-now-but-it-does-need-more-clean-energy-expertise The mention sources can contact us to remove/changing this article |
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