November 13, 2020

Breakingviews: Elliott takes power punch to greener pastures

by Breakingviews.

Elliott Management has taken its power punch to greener pastures. Paul Singer’s fund, which has bought stakes in several utility companies in recent years, wants $13 billion utility Evergy to talk with $150 billion NextEra Energy, America’s largest renewable energy firm, about a deal. Snag is, the sector is heavily regulated, and political opposition often hinders acquisitive firms’ ambitions. NextEra’s lofty valuation and Elliott’s presence could help.

NextEra, whose market capitalization recently surpassed Exxon Mobil, has been on a tear trying to ink deals. Duke Energy rebuffed an offer from the company, the Wall Street Journal reported in September. Regulators torpedoed past deals with Oncor and Hawaiian Electric Industries. And it has made gestures to Evergy that haven’t amounted to a whole lot.

Elliott wants that to change, saying on Thursday in a statement that it was Evergy’s “fiduciary duty to immediately reengage” with NextEra. The hedge fund helped appoint two board members, so its public airing of grievances suggests it hasn’t made a whole lot of headway in encouraging the company behind closed doors.

Regulators are a big hurdle to deals, and so Evergy has some valid reasons to push back. While combinations can deliver cost cuts, regulators often demand these are returned to ratepayers, which makes transactions less lucrative for shareholders. Companies can sandbag savings for public consumption, but that works best in friendly deals where the target has long-standing, tight relationships with local regulators.

NextEra’s CEO James Robo has acknowledged that only friendly deals work, but he has another ace in the hole: his stock’s valuation. The company’s record at running wind power projects has attracted investors who love growth in renewable energy – call it the Tesla-type bandwagon. As a result, NextEra trades at over 30 times estimated earnings over the next 12 months according to Eikon figures.

That compares to Evergy’s 18 times, despite that it is also planning to plow $5 billion into green energy initiatives. The relative discrepancy in value may be Evergy’s biggest gripe. It doesn’t want NextEra to scoop it up on the cheap. But a stock deal might mend the gap.

Plus, with NextEra’s help, Evergy not only benefits from the cheaper nature of generating renewable power, each dollar it earns is more valuable to public investors, too. Evergy doesn’t want to be perpetually on the block – it put itself up earlier this year but decided to stay independent – but Elliott’s annoying public persistence might be hard to resist.



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