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Elliott, Bluescape offer Sempra avenue to share price ascent

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Sempra Energy corporate headquarters in San Diego, Calif. The utility was approached by New York, N.Y.-based hedge fund Elliott Management on June 11 with an activist plan that would significantly reduce the utility's business footprint.
Source: Sempra Energy

In launching its latest campaign to carve up Sempra Energy, Elliott Management Corp. has presented Sempra management with a playbook likely to leaven its stock price, while redefining the California utility and gas giant's approach to governance.

Extending its activism streak in the U.S. power and utilities sector, Elliott working alongside specialist energy investor Bluescape Resources Company, announced June 11 its ownership of a roughly $1.3 billion position in Sempra equivalent to 4.9% of the company's outstanding shares. The announcement catapulted Sempra shares up more than 15% at the close of the session, signaling the market's conviction that the Elliott proposal is all but certain to elicit near-term value.

But extracting that value depends on Sempra's willingness to embrace the Elliott proposal, key terms of which include replacing six board members and sweeping asset sales that would ultimately bifurcate Sempra into a pure-play regulated utility and a separately traded liquefied natural gas and midstream-focused enterprise. In response, Sempra offered little by way of the proposal's reception among its management team.

"Sempra Energy is committed to an open dialogue with all shareholders and considers investor perspectives in the context of the company's existing strategy and opportunities to deliver long-term shareholder value," the company said in a statement. "Our board and management will review their letter and presentation in detail and respond in due course."

Executive reaction

Sempra has Elliott to thank in part for backing its recent acquisition of Oncor Electric Delivery Co. LLC, where the hedge fund was the largest creditor during bankruptcy proceedings of the Dallas utility's parent, Energy Future Holdings Corp., though Elliott's interest in Sempra predates its Oncor involvement, two sources familiar with the matter suggested.

The successful acquisition of Oncor set the stage for Sempra's leadership transition, where long-time senior Sempra executive Jeffrey Martin succeeded Debra Reed as CEO in March 2018. The timing of Elliott's campaign with Sempra is not wholly unintentional, one source said, and is largely predicated on the notion that Martin, as a new CEO, must decide whether to work with Elliott and Bluescape, or defend the company to pursue a different strategy.

The primary decision initially facing Martin may revolve around pressure to shake up the company's board, shifting the power dynamics toward six, new unnamed directors with specialized utility and regulatory experience. This move is intended to mitigate what Elliott regards as a lack of, "industry and capital allocation know-how and credibility," according to the firm's presentation.

Elliott's calls for creation of a strategic review committee at the board level follows a familiar playbook of providing ownership and autonomy to select board members to hire third-party advisers to begin an extensive commercial review. Such a process could ultimately expose the board to more aggressive ideas that could help move the company beyond what one source indicated is some $10 billion in targeted asset sale proceeds.

Spin-offs and sell-downs

Elliott and Bluescape's activist strategies in 2017 targeted NRG Energy Inc., with the pursuit of some $4 billion in asset sales catalyzing a strategic reorganization that occurred simultaneously as the company's share price increased by more than twofold. Similarly, asset sales will play a key role in driving what Elliott projects could help contribute to as much as $16 billion in shareholder value creation, owing in part to sizeable share buy-backs and debt pay-down plans.

The so-called "back to basics" strategy would be one focused on California and Texas as core markets, with the potential to recycle capital back into San Diego Gas & Electric Co. and Southern California Gas Co. and position the utilities toward scaling within California, sources say.

Additionally, a spin-off of Sempra's midstream and LNG assets is meant to capitalize on the equity market's interest in publicly-traded LNG firms, according to the investor presentation, pointing to Cheniere Energy Inc., Tellurian Inc. and NextDecade Corp. Based on its calculations, assuming $1,700 per metric tonne annually, Elliott and Bluescape suggest Sempra's Cameron LNG facility would have a $24 billion total enterprise value, compared to Cheniere's roughly $44 billion total enterprise value, as of June 8, according to S&P Global Market Intelligence data.

Bolstering the rationale behind a proposed divestiture of Sempra's Latin American utility holdings, including its stake in the Peru-based Luz del Sur SAA and Chile-based Chilquinta Energia SA, is strong buyer interest in such holdings by large European utilities companies, one source said, including Enel SpA and Iberdrola SA. Large infrastructure investors like Global Infrastructure Partners, IFM Investors, GIC Pvt. Ltd., Canada Pension Plan Investment Board and Macquarie Group Ltd. may be among those also interested in the Latin American assets, in addition to Sempra Renewables LLC

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Credibility factor

Wall Street analysts responded favorably to news of Elliott's initiative for Sempra, expecting that the involvement of Bluescape, led by C. John Wilder, can stoke new pools of cash for Sempra and minimize perceived overhang on its portfolio.

"We view Elliott and Bluescape (John Wilder) as credible in the utility space and we also believe that [Sempra]'s portfolio is ripe [for] optimization," Wells Fargo Securities analysts wrote June 11.

"We see this as a very solid opportunity and potentially a [near-term] catalyst for Sempra," Guggenheim Securities added separately. "We have certainly highlighted the asset optimization strategy as an opportunity to limit equity needs and/or reduce exposure to its foreign assets and believe a successful execution of this strategy would go a long way in removing the conglomerate discount assigned to shares. At the end of the day, we would expect that Elliott Management and Bluescape could have a similar impact that it has had with NRG."

Sempra is scheduled to hold an analyst day in New York on June 28.