Activist investors Elliott Management Corp. and Bluescape Resources Co. LLC are calling for a strategic review at Sempra Energy to unlock what the hedge funds have identified as an $11 billion to $16 billion value creation opportunity.
In a letter and presentation to Sempra's board announced June 11, Elliott and Bluescape recommend a "refresh" of the board with six independent directors to oversee a transition to a "Sustainable Sempra," and the establishment of a strategic review committee of the board, "empowered to conduct full portfolio and operational reviews to identify value-creation opportunities for all shareholders."
The proposed strategic review is being driven by Sempra's, "excellent" long-term, critical infrastructure businesses, "but its focus on sheer size has led to the creation of a conglomerate structure in which these disparate businesses are grouped together with no compelling strategic or financial rationale," according to the June 11 news release.
"The resulting complexity and management and Board detachment has introduced numerous risks for all key stakeholders, leading Sempra's share price to meaningfully underperform and persistently trade at a steep discount to both peers and achievable value," Elliott Management Corp. Portfolio Manager Jeff Rosenbaum and Bluescape Resources Executive Chairman C. John Wilder said in their letter to the board.
Elliott and Bluescape are asking for the creation of a strategic review committee of the board to formulate a plan to unlock Sempra's conglomerate discount, highlight the value of its LNG development pipeline and improve the reliability of its utility through continued investment with no net increase in customer rates. Once an agreement has been made with the board, the hedge funds believe a strategic review can be completed and a plan announced to all key stakeholders by year-end.
If executed, this would result in a price of $139 per share to $158 per share for Sempra, representing an uplift of 38% to 57%. Shares of the utility opened at $101.29 on June 11.
The hedge funds together own a $1.3 billion, or 4.9%, economic interest in Sempra. The investors have previously made pushes for strategic overhauls at other energy business. In 2017, both hedge funds made a similar appeal to NRG Energy Inc., resulting in the replacement of two board members and the launch of a strategic review. The result, one year later, included a strategic pivot by NRG, traditionally a merchant generator, into an integrated competitive power company with a greater focus on retail.
Elliott was also instrumental in blocking Berkshire Hathaway Inc.'s takeover of Dallas transmission and distribution utility Oncor Electric Delivery Co. LLC in 2017 by purchasing a majority interest in the remaining class of debt at Oncor's bankrupt parent company Energy Future Intermediate Holding Co. LLC. Sempra ultimately emerged as the majority owner of Oncor.
