Attack on Perth-based SSE reflects interest in renewables

It was one of a range of investment operations that put pressure on the board of Alliance Trust amid claims that the in-house team that managed the Dundee-based institution was not doing a good enough job.

After years of unrest the former chairman of the trust, Lord Smith of Kelvin, initiated a review that resulted in management of the trust being out-sourced in 2017.

The change may have brought some benefits for shareholders in the relatively short period since it was made but there is no guarantee that the managers involved will continue to deliver the goods.

READ MORE: Manager of Edinburgh Investment Trust bought by London-based firm

The Scottish investment industry is the poorer for the loss of Dundee-based jobs that were associated with the management of the trust. The asset management operation was swallowed up by London-based Liontrust. This recently acquired the manager of the Edinburgh Investment Trust (EIT), Majedie Asset Management, which is also based in London.

EIT, which was founded in 1889, had been managed in Scotland for decades until its board ditched the former Edinburgh Fund Managers in 2002 in favour of London-based Fidelity.

Elliott, which manages $48bn and has headquarters in Florida, has now decided that big changes need to be made at SSE.

It reckons that the management team led by chief executive Alistair Phillips-Davies have deprived SSE shareholders of around £5 billion value by maintaining a structure that means the shares are bound to be under-valued by the market.

SSE is developing the giant Dogger Bank windfarm off North East England Picture: GE Renewable Energy (Image: SSE)

This is because SSE combines renewable energy generation operations with networks that can be used to get the power they produce to where it is needed. Elliott reckons these do not belong together.

After pressing management for months to break the group up into separate businesses without success, Elliott broke cover last week in an apparent attempt to increase the pressure.

READ MORE: Scottish energy giant in war of words as activist investor calls for break up

The investment firm published a copy of a sharply-worded letter that it had sent to SSE chairman Sir John Manzoni which included scathing criticism of Mr Philips-Davies and colleagues.

In the letter Elliott said: “The market’s failure to ascribe fair value to SSE and its portfolio is directly attributable to the Company’s inefficient conglomerate structure and confusing equity story.

“Renewables and Networks are intrinsically different businesses, supported by divergent shareholder registers, with individual funding needs, growth profiles and strategic priorities.”

The firm added: “SSE shareholders today receive only a fraction of the value of SSE’s businesses, and its persistent stock-price underperformance has been a problem that management has failed to address.”

Elliott rubbished the defence of SSE’s strategy which the company had issued in November, following a review Elliott claimed was opaque and deeply-flawed. It called for the appointment of two new independent directors to help beef up corporate governance.

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If the intention was to browbeat management into submission, Elliott must have been disappointed by the response.

SSE mounted a spirited defence of its strategy and the review process completed in November and reiterated claims that a break-up would impose hefty costs on the firm, including £95 million annual “dis-synergies”.

Mr Phillips-Davies said: “Separation risks valuable growth options across the clean energy value chain, would jeopardise our ability to finance and deliver the major infrastructure the UK needs to create jobs and achieve net zero, and would lose shared skills that benefit the group.

“Separation does not support the financing of our core growth businesses and would rule out adjacent growth options, as well as reducing the resilience of the business model.”

The outcome of the spat will be followed with keen interest in Scotland given the importance of having major stock market-listed firms based in the country.

There would be big fears about the impact of a break-up of the group on jobs. However, supporters of a break up might hope that it could end up with both the renewables and networks businesses operating as listed businesses with their headquarters in Scotland.

READ MORE: £145m takeover of Edinburgh fintech approved after jobs impact fears

There did not seem to be much appetite for a break up among some significant shareholders in SSE last week.

Life and pensions stalwart Royal London, which employs 1,400 people in Scotland, came out in defence of the strategy pursued by Mr Philips-Davies noting that SSE is working on a significant offshore wind pipeline. This includes the Dogger Bank windfarm off north east England, which is set to become the world’s biggest, and Seagreen off the Angus Coast.

Mike Fox, head of sustainable investment at Royal London’s asset management operation, told the FT: “SSE’s blend of networks, renewables and thermal generation is the right business approach, from both a climate perspective and an investment perspective.”

Asset manage heavyweight Columbia Threadneedle told the paper it was not convinced that breaking up SSE made sense.

The comments came in a week in which Royal London won a boost in its efforts to show that the mutual ownership model that it supports still makes sense. This came when members of the LV= business, which was formerly known as Liverpool Victoria, failed to support a £530m takeover bid by the Bain Capital private equity business. The promise of £100 payouts to every member in the event of the takeover going ahead was not enough for Bain to win the required 75% support for the proposal.

Royal London last year made a bid in respect of LV= which was snubbed by management. It said last week that it has offered to enter into immediate and exclusive discussions with LV= to agree a mutual merger that will offer its customers the opportunity to have their life savings protected and invested by a mutual.

READ MORE: Heavy hitter shows confidence in Glasgow financial services mutual

Bain’s bid for LV= shows financiers can see value in businesses that may appear to be unfancied.

But while Elliott reckons SSE is undervalued as a conglomerate the energy giant appears to be having no trouble raising huge amounts of money from institutions that want to invest in renewable energy projects.

READ MORE: Perth-based energy giant wins bank backing for £3bn windfarm

In recent weeks it has sold a 10% stake in Dogger Bank to Italian oil giant Eni for £70m and secured funding from banks for the £3bn third phase of the windfarm, which it is developing with Norway’s Equinor.