Activist investor Paul Singer's Elliott Management on Monday revealed its latest target in the power and utilities space: Sempra Energy.
If that pairing sounds familiar, it should. Last August, Singer played a pivotal role in Sempra's purchase of Oncor, in the process, spoiling Warren Buffett's bid for the Texas utility. By threatening to launch a rival offer for Oncor, Elliott exploited the Oracle of Omaha's aversion to bidding wars and cleared a path for Sempra to acquire the Texas-based operator of transmission and distribution lines.
Now, Elliott and Bluescape Resources — frequent allies in activist campaigns in the utility space — are taking issue with Sempra's business mix less than a year after Singer helped add Oncor to its portfolio. The investors on Monday called for an overhaul of Sempra's board of directors and a strategic review of its assets and operations.
The firms say they can reverse a period of underperformance for the San Diego-based Fortune 500 company and unlock $11 billion to $16 billion of value, penciling out to a boost of $139-$158 per share for investors.
"Despite the attractive characteristics of its businesses, Sempra shares are deeply undervalued by the market. In our view, this persistent and substantial undervaluation stems from a focus on sheer size that has permeated management and Board thinking," Elliott portfolio manager Jeff Rosenbaum and Bluescape Executive Chairman C. John Wilder said in a letter to Sempra's board.
Sempra on Monday said its board and management would review the letter and presentation sent by Elliott and Bluescape.
"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," it said in a press release.
Together, Elliott Associates, Elliott International and Bluescape said Monday they hold a 4.9 percent stake in Sempra worth $1.3 billion.
Elliott and Bluescape have already partnered to turn around two other power market players, NRG Energy and FirstEnergy. Shares of NRG have more than doubled since Elliott revealed its stake in the company in January 2017. FirstEnergy's stocks price is up nearly 14 percent since Jan. 22, 2018, when Elliott and Bluescape announced an investment in and advisory role with the Akron, Ohio-based utility.
On Monday, shares of Sempra Energy surged about 15 percent, likely reflecting investor confidence in Bluescape's chairman. Wilder is known for shaping up Texas utility TXU and selling the company in the largest-ever leveraged buyout in 2007. He is also familiar with Sempra's Oncor business, which was spun out of TXU in 2002.
The preliminary plan at Sempra is to replace six board members and form a strategic review committee to conduct a "no stone unturned" review of Sempra's portfolio and operations.
Elliott and Bluescape say Sempra's stock price underperformance boils down a failed strategy to build a power market conglomerate. Its acquisition of "valuable but divergent businesses" has led to a lack of focus that yields operational problems.
Compounding the problem, Sempra's executive compensation structure is not engineered to reward its leaders for enriching shareholders and its board empowers the longest-serving members, Elliott and Bluescape claim.
"Sempra's growth strategy relies on siphoning earnings and creditworthiness from its core California utilities and deploying that capital into various unrelated businesses with poor returns and results," they said in a presentation accompanying the letter.
Those California businesses include natural gas and electricity delivery companies SoCalGas and San Diego Gas & Electric. Elliott and Bluescape envision those as forming a stand-alone utility along with Oncor.
The firms also see potential in a company formed by its two operators of liquefied natural gas export terminals, Cameron LNG and Port Arthur LNG and its transportation company, Sempra LNG and midstream.
Elliot and Bluescape also raise the prospect of divesting four businesses: wind and solar power firm Sempra Renewables; Mexican natural gas transportation firm IEnova; Luz del Sur, Peru's largest electric utility; and Chilquinta Energia, Chile's third-biggest utility.