Market awaits SSE growth plan as activist Elliott lobbies for renewables split

From humble beginnings nearly 80 years ago as a hydropower operator in the Scottish Highlands, SSE PLC has built up a large footprint in the U.K. and Ireland across power generation and regulated energy networks. Now, as it reshapes its portfolio and expands internationally, it has become the target of an activist investor that reportedly wants to break it up.

U.S.-based hedge fund Elliott Management Corp., led by billionaire Paul Singer, is said to be pressuring the utility to separate its renewable energy business from its networks activities, building up a stake in the company in order to add weight to its campaign.

Analysts say the growth potential of SSE's renewables unit significantly outweighs that of its networks business, and hiving it off into a separate listed entity would help it raise capital from growth-oriented environmental, social and governance investors.

"An advantage of breaking up is targeting capital providers to the assets that suit them best," Dominic Nash, European utilities analyst at Barclays, said in an interview.

Few details are known of Elliott's actual game plan. Reuters reported that Elliott's stake in SSE makes it a top five shareholder, but is just under the 5% threshold that would require formal disclosure. The investor has been meeting privately with SSE representatives and other major shareholders in an effort to drum up support, Bloomberg News said Sept. 13.

SSE and Elliott did not respond to requests for comment.

'No decision'

For Elliott, its engagement with SSE follows a familiar playbook in the utilities sector: In 2019, the investor directed similar pressure on EDP - Energias de Portugal SA to push for a repositioning of its portfolio toward renewables. More recently in the U.S., Elliott acquired a shareholding worth nearly $100 million in Duke Energy Corp. and is campaigning to split the company into three parts in a bid to increase shareholder value by as much as $15 billion.

The possibility of a shake-up at SSE comes as other European energy companies look for ways to crystallize value from their low-carbon activities. Acciona SA listed its wind and solar business in July, while oil and gas major Eni SpA plans to float its combined retail and renewables business next year. Repsol SA is also said to be considering spinning off its renewables unit, and Iberdrola SA is evaluating something similar for its offshore wind division.

In SSE's case, the market has so far reacted positively to the possibility of a breakup. Shares in the company climbed to a 19-month high on Sept. 16 after speculation involving Elliott first emerged via the U.K.-based Betaville blog in early August. That comes after years of underperformance by the British utility compared with the wider utilities market.

Across the sector, pure-play renewables developers generally boast more attractive valuations than integrated utilities, Nash said, "in part caused by ESG money having a preference for the pure-plays, not the complicated stories."

But not everyone in the industry is convinced that breakups are the right strategy for utilities. For one thing, a split could lead to diseconomies of scale, for example, in shared services that would need to be replicated, Nash said. Then there is the question of power reliability.

"The capital markets have certainly had their say on ESG, but they also must separate the long-term vision from today's reality," Curt Morgan, CEO of U.S. power generator Vistra Corp., said Oct. 12 during a virtual panel organized by S&P Global Ratings. "There's a need for capital markets to embrace those of us who are truly making the transition or reliability's going to suffer and affordability will be lost."

For now, SSE has downplayed any prospect of a split. "There has been no decision to break up the SSE Group," it said in a Sept. 20 statement, opting not to mention Elliott by name. "The board remains fully focused on strategic choices which will drive shareholder value from the wealth of net-zero opportunities the company is creating."

It added that it plans to accelerate growth in its portfolio by significantly increasing its capital investment for the period to 2026, which it intends to detail alongside its vision for further growth into the 2030s when it reports its half-year results in November.

Renewables growth

Speculation around SSE's future direction comes as the company continues to reshape its business. It exited the U.K. retail electricity market in early 2020 and more recently agreed to sell its 33% stake in its gas distribution utility to a pair of Canadian investors.

What remains is a business centered around power generation and networks, and a strong emphasis on renewables growth. The company's onshore and offshore wind pipeline amounts to nearly 8 GW, according to S&P Global Market Intelligence data. By 2030, it is aiming to triple its renewables output to 30 TWh compared with 2019 levels.

Its wind portfolio includes the world's largest offshore wind farm, the 2,400-MW Dogger Bank A and B project in the U.K. North Sea, which SSE is building with Equinor ASA and Eni. A third phase of Dogger Bank will take the development to 3,600 MW in total.

That is on top of the planned 1,075-MW Seagreen Offshore Wind Farm, which SSE is developing with TotalEnergies SE, and later-stage projects such as Berwick Bank, a giant 4,100-MW development in Scottish waters.

Its existing power generation portfolio totals about 9.5 GW, with close to half from fossil fuel sources. Meanwhile, the company's networks business includes the high-voltage transmission grid in the north of Scotland and 3.7 million distribution customers, under the name Scottish and Southern Electricity Networks, in northern Scotland and central southern England.

The company is also expanding internationally for the first time, most recently into the Japanese offshore wind market, where it struck a deal giving it access to 10 GW of potential projects.

Japan adds to a growing number of international markets that SSE is eyeing. The company took its first steps this year into Spain and Portugal, and it is also looking at onshore and offshore wind opportunities in Denmark, Poland, North America and parts of northwest Europe.

But given its history so far has centered entirely around the British Isles, internationalization is a new concept. "Clearly, how well SSE executes internationally remains to be seen," analysts at Jefferies said in a Sept. 30 note after the Japanese deal.

"History is littered with utilities that have rushed into foreign markets, not understood regulation and culture and not made a success of it," Nash said. Successful expansion drives by the likes of Iberdrola and Ørsted A/S have focused on going deep into select markets rather than casting the net wide.

As for Elliott's engagement, SSE's public response is unlikely to deter the hedge fund from pursuing a deal.

"Activist investors are known for their persistence," Russ Mould, investment director at U.K.-based investment platform AJ Bell PLC, wrote in a Sept. 20 blog post, "so one can be sure that Elliott won't give up following the energy group's latest statement."