Activist hedge fund Elliott Management has asked Duke Energy to consider splitting into three separate companies, unleashing its first public salvo as part of a campaign to overhaul one of the largest utilities in the United States.
Elliott said he took an unspecified stake in Duke, which powers 7.8 million people across the Southeastern United States and the Midwest, and in a letter to management on Monday he accused them of “building an empire”.
“Based on our in-depth analysis of Duke’s business, we believe Duke should conduct a thorough and impartial review of a tax-free separation into three regionally-focused publicly traded utility holding companies: Carolinas, Florida and the Midwest, ”wrote Elliott’s Jeff Rosenbaum, senior portfolio manager, and Jesse Cohn, managing partner.
Elliott – the $ 42 billion fund whose recent activist campaigns have targeted BHP, SoftBank and Whitbread, among others – said the review should be led by an independent board committee, including new independent directors, with the assistance from external advisers.
The hedge fund has not disclosed the size of its stake in Duke, which was initially reported by The Wall Street Journal. But he said he was one of the top 10 investors.
Duke has said he will review the proposals, which he said were the latest in a series Elliott had presented since July 2020.
“Throughout, the Duke Energy board has thoroughly reviewed their proposals and determined that they are not in the best interests of the company, its shareholders and other stakeholders,” said Duke .
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He also criticized the hedge fund’s “decidedly mixed results” in the utilities sector, where it had previously acquired stakes in Sempra Energy, FirstEnergy and Evergy.
“The stock prices of these utilities have significantly underperformed the industry to date since Elliott became involved, setting an unenviable history of destroying shareholder value,” said Duke.
The aggressive public exchange foreshadows a fight to influence shareholders on the merits of Duke’s strategy and performance under the longtime leadership of Lynn Good.
Elliott argued that despite holding a portfolio of “top-notch” utilities, the company has suffered “numerous operational setbacks and strategic investments and missteps over the past decade, at a significant cost to shareholders and customers ”.
Among the “missteps” cited by Elliott was the cancellation of the Atlantic Coast Pipeline, a 600-mile pipeline being developed in conjunction with Dominion Energy. The project collapsed last year after a series of delays and court challenges, costs have skyrocketed. This triggered a $ 2.1 billion depreciation by Duke.
Elliott also pointed to the cost of a coal ash spill in 2014 and what he said was the “overvalued” acquisition of Piedmont Natural Gas in 2016.
The company, said Elliott, “has focused more on growing its footprint and portfolio than on operational execution and prudent investments, which leads to the perception among those who follow the company that Duke is “building an empire” at the expense of shareholder value ”.
A split could create between $ 12 billion and $ 15 billion in “short-term value” for shareholders, according to the hedge fund.
Duke shares rose 0.7% in a declining market on Monday. Last year, the company rejected a merger offer from NextEra Energy, a Florida-based utility and power producer, according to a person familiar with the talks.
The move on Duke is the second full-scale stake construction piece by Elliott to come to light in just over a month. The hedge fund has also built a multi-billion pound stake in GlaxoSmithKline, launching a potential battle over the British drugmaker’s future after underperforming its peers and falling behind in the race to develop a Covid-19 vaccine.