Investment firm Elliot Advisors has written to the chair of SSE to put pressure on the company to split apart its renewables and networks businesses and list them separately on the stock exchange.
The company, which advises funds that together represent one of the top five investors in the SSE, said the group’s current structure forces the divisions to compete for capital and attention and presents a confusing offer to potential investors.
In a letter shared with media outlets, Elliot said separation would increase their combined share price by around 30% and their market capitalisation by £5 billion.
The firm said the networks and renewables divisions are “intrinsically different,” with the former being a “stable, fully-regulated business generating predictable cash flows that finance capex investments and dividend” and the latter a “high-growth business with substantial upfront equity investment requirements to build scale with attractive project-level returns.”
“Despite its significant exposure to high-quality renewable assets… SSE currently trades at a steep discount to its renewables peers and only in line with pure-play networks peers that have no exposure to renewables assets,” it noted.
Elliot said the renewables business is also being undermined by the composition of SSE’s 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. This lack of expertise puts the company at a strong disadvantage to its competitors.”
The letter said SSE’s announcement in November of the sale of a 25% stake in its network represents a “missed opportunity” to unlock the group’s unrealised value. It said the “unnecessary delay” until 2023 creates uncertainty over whether the company will be fully funded and that the “unambitious target” of selling a 25% stake will means SSE will “likely face further, long-term funding pressure,” making its “path to becoming the UK’s renewable champion more difficult.”
Elliot said there has been to “no convincing explanation” for maintaining the current structure, describing the management team’s argument that separation would lead to dis-synergies as “simply not credible.” It said the “negative reaction from many analysts and media commentators mirrored the decline in the stock price.”
It said the argument that a standalone renewables business would be unable to pursue large projects such as Dogger Bank is “equally unconvincing”. It would in fact be able to raise equity at “far more attractive rates than currently” from the “flood of ESG-focused investors who would be attracted to a pure-play green energy champion.”
The letter called for SSE to dispose of larger stake of the networks business and use the proceeds to accelerate its renewables growth. It claimed thee business would achieve an “attractive valuation” given National Grid’s recent acquisition of Western Power Distribution, which implied a premium of over 60% above its regulated asset value.
Elliot also urged SSE to undertake a partial listing of the renewables business and sell a minority stake. It said this would increase the market value of the renewables business and unlock further capital for growth, whilst also avoiding the potential dis-synergies that discouraged the management team from pursuing a full listing.
Furthermore, the letter called for two new independent directors with renewables experience to be appointed to the group’s board.
Responding to the letter, SSE chief executive Alistair Philips-Davies said: “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.”
He added: “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.”