At the height of the pandemic, business was too consumed with survival to think about the two phenomena of climate change and mergers and acquisitions. Why worry over renewable energy when National Grid was warning in April last year that, with offices shut, record low demand could lead to wind farms and power stations being turned off? And few were thinking of takeovers when their businesses were struggling to stay afloat.
But things have changed. Power is at its most expensive in years as winter approaches with gas stocks at a record low and electricity tight after a fire last week shut down an undersea cable from France. Meanwhile, M&A activity has roared back to life as the economic shock brought opportunity and new deals are being completed at a brisk rate.
The government’s post-pandemic promise to “Build Back Better” will put green technology first, and SSE is the poster child for Britain’s clean energy sector. It will be a short hop from its Perth base to the Cop26 summit in Glasgow in November, where it will be talking up its green credentials to delegates, but before then it faces a challenge from the world’s most feared activist hedge fund.
Elliott Management has spent its summer quietly building a stake in SSE and wants the FTSE 100 company to spin off its renewable energy division. Elliott’s plan faces a number of questions as it targets one of the country’s biggest power providers. Does the scheme make sense?
SSE ripe for the picking
SSE has reorganised its portfolio in recent years to focus on low-carbon businesses such as electricity networks and renewables. It offloaded its retail business — selling energy to the public — to Ovo last year. It has the largest renewable electricity portfolio in the UK and Ireland, plus it is building the world’s biggest offshore wind farm, the 3.6GW Dogger Bank.
But it also still generates power from gas-fired generators, which have fallen out of favour among big investors. Some analysts were arguing that SSE could unlock value by separating the clean from the dirty long before Elliott turned up.
All over the world energy giants such as Total, BP and Eni want to get into clean power. BP recently shocked the wind farm world by seeing off the competition with a bid of £462 million a year for Irish seabed rights, more than 15 times the price paid for similar agreements in the past. Investment houses, pension funds and private investors all want sustainable projects. Prices in the renewables sector are frothing, with SSE’s shares up 38 per cent in the past year.
Chris Wheaton, an analyst at Stifel, can see both sides of the break-up argument. “Yes, you’d get more for the parts of SSE if you split them up, based on current sector trading values, but you could argue that the three sections together — the thermal power stations, the transmission grid and the renewables — make them more resilient across the piece if SSE kept them.
You get stable cash flows from transmission. I’d imagine Elliott also thinks they can get more debt into the business, which then enables cash return to shareholders. But too much debt reduces money for investment.
“Nevertheless, the valuation of a business such as Orsted [the Danish energy producer that aims to produce 80 per cent of its power from renewables by 2040] looks pretty high to me.” Orsted’s market value closed in on £43 billion last week.
Wheaton was worried about all the publicity surrounding low wind speeds in August. “The sector looks pretty volatile. And everyone is piling into wind now.”
He sensed that Elliott is seeking to make a rapid turn on a short-term investment at a time of high green energy valuations. He said: “It feels more like a market arbitrage opportunity than a long-term commitment.”
Elliott’s tactics
Founded in 1977 by Paul Singer, Elliott Management is one of the most successful hedge funds on the planet. Its agitating approach has yielded average annual returns of 14 per cent and it has been loss-making in only two years of its existence.
Singer, 77, practises “Schumpeterian Creative Destruction” — the process that sees new innovations replacing existing ones that are rendered obsolete. His legendary campaigns include one against the Argentine government when he bought a chunk of their defaulted debt and pursued the South American nation in courts across the globe to get his money back for nearly a decade. He even seized an ageing Argentine naval vessel docked with 200 crew in port at Accra, Ghana. Buenos Aires finally hoisted the white flag and coughed up $2.4 billion — a 1,270 per cent return on Singer’s outlay.
SSE is the second FTSE 100 company this year to find Elliott’s tanks on its lawn. Singer is having a pop at Glaxo Smith Kline, demanding a radical restructure that would include boss Dame Emma Walmsley reapplying for her own job.
Singer has a fearsome reputation among chief executives and board members. Former Athenahealth boss Jonathan Bush, whose company was targeted by Elliott in 2017, described doing research on Elliott as “Googling this thing on your arm and it says, ‘You’re going to die’ ”.
Elliott is nothing if not tenacious and smells opportunity in a sector into which cash-rich extractors from the oil and gas industry are piling at speed.
Critics say activists such as Elliott are not company builders, but instead push for asset offloads and bruising leadership upheavals with a short-term focus that is unhelpful in driving innovation or long-term benefit. Elliott’s arrival also creates a difficult problem for ministers.
Downing Street dilemma
SSE is a key part of our national infrastructure, not just now, but as part of UK plc’s attempt to decarbonise over the coming decades. As SSE chief executive Alistair Phillips-Davies pointed out in a policy paper last month, SSE’s strategic focus is on renewables and regulated electricity networks. He has done the restructuring already.
“With the size of the GB electricity sector set to at least double by 2050, according to National Grid and Climate Change Committee forecasts, and with the generation mix needing to be largely decarbonised by the late 2030s, these businesses are key to enabling a net-zero economy. They therefore have strong growth potential and, importantly, they fit together.”
This might prove a tricky judgment call for business secretary Kwasi Kwarteng. He was in last week’s headlines not for being reshuffled but for proclaiming that “the capitalist free market was to blame for global warming”. In a fairly astonishing outburst for a die-hard Conservative, he said that governments around the world had a duty “to legislate and intervene” to protect the environment. This may not have been music to Elliott’s ears.
A senior executive at one of SSE’s rivals made it clear how big a headache an Elliott-inspired shake-up of SSE may prove for the government. “SSE isn’t badly run. They are innovative, they don’t stifle talent. They do lots of good stuff,” she said. “Is there ‘value’ to be released by breaking it up? Well, maybe, but it would be short term, and to whom [will it be sold]? The government has to make up its mind how it views electricity. Is it simply a marketable commodity or a public good? It’s never come out and said the latter.”
Others are more sanguine. Johnathan Reynolds of consultancy Opergy said: “Government already has many levers it can pull to influence any energy generator. It’s a hugely regulated sector.”
The government remains keen to promote the UK as open for business post-Brexit. Trade minister Lord Grimstone recently declared that “UK firms perform better under foreign ownership”. “I don’t think we should be fearing overseas investment — we should be grasping it,” he told the BBC. But then, it was unlikely to be Elliott he was referring to.