San Diego Sempra Energy has the potential to grow to at least $139 per share, activist investors said recently as they introduced a proposal to remake the company’s board and streamline its business model by jettisoning certain assets.
CEO: Jeffrey Martin
Revenue: $11.2 billion in 2017; $10.2 billion in 2016
Net income: $256 million in 2017; $1.37 billion in 2016
No. of employees: 16,046 companywide
Headquarters: Downtown San Diego
Year founded: 1998
Stock symbol and exchange: SRE on the New York Stock Exchange
Company description: Energy services holding company and parent to San Diego Gas & Electric Co.
The activists said their plan could add $11 billion to $16 billion in value, taking Sempra’s stock price to a range of $139 to $158 per share.
Shares in the energy holding company spiked 18 percent to a high of $119.78 on June 11, the day Elliott Management and Bluescape Resources Group made their plan public. Shares in Sempra (NYSE: SRE) closed the day at $117.19, having appreciated 16 percent from their June 8 close of $101.43.
The two investment firms describe their strategy as a “back to basics” approach.
Sempra acknowledged receiving Elliott and Bluescape’s letter, adding that it would respond after further consideration.
“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 statement said. “Our board and management will review their letter and presentation in detail and respond in due course.”
Elliott and Bluescape, which collectively own 4.9 percent of the company, say Sempra is undervalued and needs change. They said they have lined up six candidates with appropriate backgrounds, able to take seats on the 14-member Sempra board. They also recommend a thorough examination of Sempra’s businesses, with an eye toward exiting some of them.
The offer came barely a month after Sempra shareholders elected a full slate of directors at its annual meeting May 10.
“Elliott and Bluescape have chosen a particularly vulnerable time to press their case,” wrote analyst Christopher Turnure of J.P. Morgan.
Sempra has a brand new CEO in Jeffrey Martin, who was promoted May 1 after holding several leadership positions in Sempra Energy, San Diego Gas & Electric Co. as well as Sempra U.S. Gas & Power. He succeeded Debra Reed, who plans to remain chairman until December.
The activist shareholders said they recently worked with two other companies in the utility industry, NRG Energy Inc. (NYSE: NRG) and FirstEnergy Corp. (NYSE: FE), to get better shareholder returns. The review created “more focused companies,” the investors said.
A specially formed committee should undertake a top-to-bottom review of Sempra’s business, Elliott and Bluescape said.
San Diego-based Sempra is parent to San Diego Gas & Electric and Southern California Gas Co. It has a variety of other energy businesses which operate nationally and internationally.
After initial research, the activists suggested that Sempra hold on to its U.S. utilities while spinning off its liquefied natural gas business to shareholders. The spin-off would include Sempra’s interests in Cameron LNG and Port Arthur LNG.
They also suggest the corporation divest itself of the Sempra Renewables unit as well as its foreign holdings, namely IEnova in Mexico, Chilquinta Energia in Chile, and Luz del Sur in Peru.
In addition, they call on Sempra to reduce its debt.
Elliott and Bluescape make their case for change at Sempra on the website SustainableSempra.com.
“Despite the attractive characteristics of its businesses, Sempra shares are deeply undervalued by the market,” the investment firms said in a letter to the Sempra board.
“In our view, this persistent and substantial undervaluation stems from a focus on sheer size that has permeated management and board thinking. This has led to the creation of a conglomerate structure consisting of disparate businesses grouped together with no compelling strategic or financial rationale. The resulting complexity and management and board detachment has introduced numerous risks for all key stakeholders.”
In a more detailed presentation, the two investment firms said the recent natural gas leak at SoCalGas’ Aliso Canyon storage facility near Los Angeles is “an example of ‘eye off the ball’ mismanagement of core operations.”
Paul Singer founded and runs Elliott Management. The firm recently got involved in Qualcomm Inc.’s bid for NXP Semiconductors N.V. In December, Elliott made the case that Qualcomm’s bid for NXP was too low, given NXP’s potential as a maker of automotive and industrial semiconductors. Qualcomm (Nasdaq: QCOM) increased its bid for NXP (Nasdaq: NXPI), which still awaits the approval of Chinese regulators as of this deadline.
Bluescape describes itself as a private investment firm focused on value-oriented investments in the upstream oil and gas and power industries.
“Despite SRE’s recent interest in selling assets, we largely see the idea of divesting/spinning everything but the utilities as the polar opposite of the intended direction of new management,” J.P. Morgan’s Turnure said in his June 11 note.
Turnure lowered his price target from $105 to $103 per share.
Evercore ISI analyst Greg Gordon raised his price target on Sempra from $117 to $130 per share.
“Our updated $130/share 12-month target price presumes that SRE will ultimately engage with these investors” and that will increase the value of the company, he wrote.