Elliott Management Corp. believes that Evergy Inc. should abandon its share repurchase plans and instead explore two alternative paths that the activist investor believes will unlock up to $5 billion in value.
"We believe a full revamp of Evergy's long-term capital plan and operating strategy is necessary to address underperformance and unlock full value for the benefit of all key stakeholders," Elliott Management wrote in a Jan. 21 letter to the utility's board of directors.
The New York investment firm publicly released the letter in which it implored Evergy's management team to invest in core utility operations and "critical system infrastructure" to rectify the company's prolonged stock price underperformance, discounted valuation and increased cost of capital.
Elliott believes that this focus on core infrastructure investment will "not only provide meaningfully more value to shareholders than the current strategy to repurchase shares, but would also provide clearly superior benefits to Evergy's other stakeholders, help facilitate the company's deployment of renewables and reduce its carbon footprint."
The hedge fund urged Evergy to explore an alternative stand-alone path under which the company, certain new board members and a new management team would develop a plan to "increase critical infrastructure investment and optimize operating costs" to drive annual rate-base growth of up to 10% "with no expected overall rate impact on customer bills."
A second alternative plan calls for Evergy to explore a "premium stock-for-stock merger" under which Evergy's current shareholders would receive stock in a newly combined entity with the utility's new partner overseeing the implementation of a revamped strategic plan.
"Elliott believes either path, if executed properly, should result in high-certainty, line-of-sight equity value creation of up to $5 billion, with opportunities for significant additional value creation over time," the firm wrote.
The New York investment firm disclosed that it owns an economic interest equivalent to 11.3 million shares in Evergy, representing about $760 million in current market value.
"We have made such a large investment in Evergy because we believe a clear opportunity exists to create significant shareholder value," Elliott wrote in its letter.
In June 2018, Elliott Management and another investor, Bluescape Resources Co. LLC, offered a similar shake-up plan for Sempra Energy that resulted in the sale of a number of assets and a refining of Sempra's overall strategy.
Every, in a statement released Jan. 21, said it is "open to evaluating opportunities that may create greater value," with the understanding that Elliott has different views on the utility's strategic plan.
"At the same time, there are various considerations that we believe are important when evaluating the conclusions that Elliott has asserted in its letter," Evergy wrote, adding that it has "engaged in good faith" discussions with Elliott since October 2019 on the investment firm's proposals.
"As expressed to Elliott, we are confident in our ability to deliver long-term growth and shareholder value creation through the execution of our strategic plan," Evergy wrote. "This plan includes maximizing operational savings from our 2018 merger, the share repurchase program we committed to when this merger was completed, paying a competitive dividend and making capital investment that will drive value."
Evergy added that it believes merger savings, share repurchases, dividends and its current infrastructure investment plans are driving earnings growth and shareholder returns.
"At this time ... we believe the greatest return opportunities for Evergy's capital beyond our current investment plan are share repurchases and growing the company's dividend," the company wrote. "Together with the company's merger savings and incremental infrastructure investments utilizing plant in-service accounting in Missouri, we expect to deliver compounded annual earnings growth of 5% to 7% through 2023."
Evergy born out of merger of neighbors
The Kansas City, Mo.-headquartered utility was formed in June 2018 following the $15 billion stock-for-stock merger of Midwest electric utilities Westar Energy Inc. and Great Plains Energy Inc.
Evergy initiated its aggressive share repurchase programs in August 2018 as part of the company's plan to rebalance its capital structure following the merger.
Evergy plans to buy back up to 60 million shares by mid-2020 using a combination of open market and accelerated share repurchases.
"[T]he valuations in our sector, as well as interest rates rising, are making the share repurchase program more expensive, but it's still accretive, and the right thing to do is to rebalance the balance sheet," Evergy Executive Vice President and CFO Anthony Somma told analysts and investors on the company's fourth-quarter 2018 earnings call.
The CFO's comments came as Evergy management outlined a plan to buy back an additional 3 million shares by March 2019 after repurchasing about 16 million shares during the latter half of 2018.
The stock closed down more than 7% at $53.74, after accounting for dividends and splits, on Feb. 22, 2019, the day of the call.
Elliott argued the utility's underperformance is a sign that investors are "increasingly skeptical" of the company's long-term strategy.
Evergy's share price closed up about 2% at $68.67 in heavy trading on Jan. 21.
Evergy has retained Morgan Stanley as a financial adviser and Morgan, Lewis & Bockius LLP as legal counsel to assist the company's evaluation of Elliott's proposals and the utility's strategic plan.