SSE under renewed attack from US hedge fund

SSE has come under a fresh attack from US activist hedge fund Elliott Management, which is now calling for the Perth energy giant to “explore additional strategic initiatives, including a more ambitious disposal of Networks and a partial listing or partial disposal of Renewables.”

Elliott, which criticized the performance of SSE CEO Alistair Phillips-Davies, is also calling on the Perth group to hire two new independent directors with renewables experience and to create “a strategic review committee composed of independent board members.”

Elliott has also argued that SSE should “list the entirety of its Renewables business, creating two standalone FTSE 100 UK companies.”

The hedge fund now claims “funds advised by Elliott Advisors (UK) Limited … together represent one of the top five investors in SSE.”

Elliott claimed SSE’s recent strategic review was “opaque” and it “raised serious questions about the legitimacy of the review and the adequacy of SSE’s corporate governance under which it was conducted.”

SSE CEO Phillips-Davies replied: “Separation risks valuable growth options across the clean energy value chain, would jeopardise our ability to finance and deliver the major infrastructure the UK needs to create jobs and achieve net zero, and would lose shared skills that benefit the group.

“Separation does not support the financing of our core growth businesses and would rule out adjacent growth options, as well as reducing the resilience of the business model — it is not the right outcome to maximise value for shareholders or our other stakeholders.”

Elliott outlined its demands in a long letter to SSE chairman John Manzoni.

SSE shares have risen about 20% over the last 12 months to a current level of about £16.37, giving it a current stock market value of around £17.5 billion.

Elliott claimed in its letter: “During the eight-year tenure of Mr. Phillips-Davies as CEO, SSE has underperformed the European Utilities index by 77%.

“If SSE had only performed in-line with this index, it would have generated an additional £11 billion of value for its shareholders.

“Additionally, SSE’s stock price has historically underperformed across all other relevant benchmarks, including among its closest peers.”

SSE is one of Scotland’s largest listed companies and among the country’s biggest employers.

Elliott said in a statement: “Elliott believes that SSE’s high-quality portfolio of Networks and Renewables assets is worth £21 per share, and that the company could have unlocked £5 billion of value through a listing of its Renewables business.

“In Elliott’s view, pursuing such a path could have simultaneously resolved SSE’s long-standing funding challenges and established the company’s position as the U.K.’s renewables champion.

“Unfortunately … SSE’s announcement on 17 November failed to provide any convincing explanation for why the company was not pursuing a listing of Renewables.

“While SSE announced an initial sale of a minority stake in Networks, both the quantum and the timing of that transaction lacked ambition.

“Cutting the dividend disappointed many investors, particularly those who are income oriented and invest in SSE for the dividend stream it has historically provided.

“And 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.

“Given the company’s failure to put forth a comprehensive vision for how it can remedy its underperformance, Elliott challenges SSE to provide a detailed and credible plan to address investor concerns around SSE’s corporate governance, its ability to fund its growth in the long term, and its persistent undervaluation.

“Among the steps the letter calls on SSE to pursue immediately are to 1) explore additional strategic initiatives, including a more ambitious disposal of Networks and a partial listing or partial disposal of Renewables; 2) add two new independent directors with renewables experience to the board; and 3) create a strategic review committee composed of independent board members.”

SSE CEO Phillips-Davies added“Having conducted a rigorous process involving constructive engagement with shareholders, and consideration of independent advice, we were delighted to launch our Net Zero Acceleration Programme on 17 November which represents the optimal pathway to accelerate clean growth, lead the energy transition and create value for all stakeholders.

“Since then we’ve continued to have constructive and supportive discussions with our major shareholders and stakeholders about the plan, which was also backed by Moody’s who reaffirmed SSE’s Baa1 rating and upgraded their outlook to stable on the strength of the plan.

“We are the UK’s clean energy champion; our plans maximise our potential and will mean that we are investing around £7 million a day, enabling delivery of over 25% of the UK Government’s 2030 40GW offshore wind target and over 20% of upcoming UK electricity networks investment, whilst deploying flexibility solutions and exporting our renewables capabilities overseas.”

In its letter to SSE chairman Manzoni, Elliott said: “During our dialogue these past several months, we have shared with you our view that SSE owns one of the most attractive portfolios of Renewables and Networks assets.

“Yet SSE shareholders today receive only a fraction of the value of SSE’s businesses, which we believe are worth £21 per share (representing a ~30% upside to the current share price, or a £5 billion increase to the current market capitalisation).

“We discussed with you our view that SSE should list the entirety of its Renewables business, creating two standalone FTSE 100 U.K. companies, each better positioned to deliver on its respective distinct mission.

“And we demonstrated to you that a separation would resolve the long-term funding challenges that have hindered SSE’s growth historically, reversing years of share-price underperformance and allowing SSE to accelerate the green-energy investments required for it to become the U.K.’s renewables champion.

“A number of your competitors including Acciona, Eni and Iberdrola have already capitalised on this opportunity by advancing or examining plans to list their own renewables businesses.

“The strategic initiatives announced on 17 November represent a first step in the evolution of SSE’s structure towards an eventual separation.

“It appears that our constructive dialogue contributed to your decision to materially increase the CapEx plan and to sell a stake in the Networks business.

“However, your announcement lacked ambition and disappointed your shareholders as well as many analysts and media commentators who were expecting more, as evidenced most clearly by the 4% drop in SSE’s share price on the day — amounting to close to £1 billion of market capitalisation destruction.

“Not only did SSE decide not to announce a bolder move towards a separation, it also added to the frustration of its investors by cutting the dividend without adequately addressing the company’s long-term funding needs.

“One Barclays report summed it up well: ‘We see SSE trying to please everyone … as being a risk of pleasing no one.’

“As the company has failed to put forth a comprehensive vision for how it can remedy its persistent undervaluation, reverse its historical share-price underperformance and adequately fund Renewables growth beyond 2026 (a critical priority for accelerating the U.K.’s transition to Net Zero), we are making our views on SSE public today in the hope of fostering a broad and constructive debate on the right path forward for the company and its stakeholders.”

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.