Elliott Management’s open letters are improving. When the US activist hedge fund tried to take a pop at GlaxoSmithKline in the summer, it produced 17 pages of waffle that could have been condensed to a few sentences of substance. Tuesday’s 10-page blast at energy group SSE was tighter, scored a couple of solid hits and should make the newish chairman, Sir John Manzoni, realise the Perth-based firm is in a scrap.
That is not to say Elliott is right on every score, or even on its main demand that SSE should be split in two. Indeed, one of the activist’s points was plainly exaggerated – the idea that an “unequivocal message” was sent by the 4% fall in SSE’s share price on the day last month when the company unveiled its energy transition strategy alongside a delayed dividend cut.
Come on, the signal in the share price – now down just 1.8% – simply isn’t clear. Rather than being “thoroughly frustrated”, as Elliott claims, SSE’s investors merely seem uninspired. That, though, is hardly a triumph for a £17bn FTSE 100 company at the moment of its great strategic reset.
Manzoni could start by addressing Elliott’s legitimate criticism that SSE didn’t show its arithmetic when it refused to split its renewables assets from its electricity transmission and distribution networks on grounds of cost. The financial detail was indeed missing. What are the £200m worth of separation costs and £95m of “quantifiable dis-synergies”? Both figures need explaining.
The heart of SSE’s “better together” defence, though, was weightier: it was the argument that it’s cheaper to finance the construction of more renewables assets, primarily offshore windfarms, when the division is housed under the same roof as a networks and distribution division that throws off cash reliably.
SSE’s argument feels intuitively correct since size and diversity of income tend to deliver lower funding costs over time. But it is not one that is universally accepted – three big continental European energy firms are contemplating doing the splits – so, again, the evidence needs to be displayed.
In its absence, Elliott’s refrain that a standalone renewables division would be inundated with offers of cheap capital from ESG-friendly investors will sound beguiling. The hedge fund may be guilty of wishful thinking (Danish pin-up Orsted’s share price is down 35% this year, note) but SSE needs to slam its points home, which means showing you’ve engaged with the nitty-gritty.
Then there’s the make-up of SSE’s board, which is where Elliott’s case is strongest. Look down the list of non-executive directors and it’s not obvious who the renewable specialists are supposed to be. There is big-project expertise aplenty from directors whose executive lives were spent at the likes of BP, Eon and National Grid, but out-and-out renewables experience is thin. That is a problem when you’re trying to bill yourself as the UK’s “clean energy champion”.
The smart move by Manzoni would be to grant Elliott’s wish for two new non-executives. It might even take some heat off the chief executive, Alistair Phillips-Davies, who, after eight years in post, probably isn’t planning to stay forever anyway.
In the end, SSE should win this tussle. It was supremely well-connected in Westminster and Edinburgh even before Manzoni, a former permanent secretary of the Cabinet Office, arrived. It is not going to be bullied easily by an activist that, for all its noise and reputation, owns less than 5% of the share capital.
But a point-by-point response to Elliott is required. The activist may be wrong about the immediate need for a split, but SSE needs to be seen to win its case convincingly. The company is planning to spend £12.5bn over five years on critical infrastructure. Non-Elliott investors need to be fully signed up.
It wasn’t a mea culpa from Nick Train of Lindsell Train, one of the very few fund managers who still enjoys (deservedly) star status among retail investors. Rather, it was an admission that current stock markets are tough. His funds are experiencing “arguably the worst period of relative investment performance in our 20-year history”.
An underweight position in technology stocks – the likes of Tesla – is one main explanation, plus an absence of cyclical manufacturing stocks that have enjoyed the Covid recovery. Train promises to stick to his tried-and-tested long-term approach, which is exactly what his investors will want to hear. But the markets do increasingly feel erratic. The FTSE 100 index, up 100 points on Tuesday, seems to have decided that the Omicron variant is not much to worry about. A tad premature, surely.