Elliott Urges Duke Energy to Separate Into Three Companies

Elliott Investment Management is calling on Duke Energy Corp. to explore splitting into three companies, a move it argues could unlock as much as $15 billion in value for investors.

The New York-based hedge fund said in a letter to Duke’s board Monday that it believes the company is underperforming despite owning high-quality utility franchises. Elliott, which says it’s a top-10 investor in the company, said Duke should separate into three regionally focused, publicly traded holding companies in the Carolinas, Florida and the Midwest. A review of that potential strategy should be led by an independent board committee including some new directors, the investor said.

The push by Elliott, which has successfully lobbied for change at some the world’s most prominent companies, runs counter to the trend over the past decade of large utilities buying up smaller rivals to expand their customer bases, achieve economies of scale for massive infrastructure investments and run their operations more efficiently. The activist hedge fund argues that that Duke’s “noncontiguous conglomerate” structure has made the company hard to manage and has led to few, if any, upsides.

“We are confident that this independent structure and review process provides the clearest path for the company to enhance credibility with investors and maximize value,” Elliott senior portfolio manager Jeff Rosenbaum and managing partner Jesse Cohn said in the letter.

Duke said Elliott has made a series of proposals since July 2020, which the utility’s board of directors decided weren’t good for the company or its shareholders. Among those, Elliott proposed Duke issue up to $7 billion in common equity to the hedge fund and its affiliates at a discount in exchange for roughly 10% of the company, according to Duke.

In a statement, Duke said it will always advocate for the long-term interests of its stakeholders over “any narrow special or short-term interest.”

“Given the performance of the company, there is no strategic logic to breaking the company apart, and there is serious risk of dis-synergies that would weigh down the various spun-off entities and raise questions about the viability of the dividend to shareholders,” Duke said.

Duke rose 0.9% to $104 per share at 2:23 p.m. New York after earlier climbing as much as 4.8%. Shares have gained nearly 14% this year, buoyed by tailwinds including a settlement over coal ash in North Carolina and the sale of a stake in its Indiana utility to Singapore’s sovereign wealth fund, GIC.

“Color us skeptical that separating Duke into smaller utilities would prompt a near-term re-rating in Duke’s share price,” said Wells Fargo analyst Neil Kalton. And South Carolina Gov. Henry McMaster wrote a letter to Duke chief executive Lynn Good last week that said Duke should remain an independent company headquartered in the Carolinas.

Investors for some time now have wanted utilities to spin off unregulated units and focus on businesses like basic utility services and transmission development, which tend to generate stable returns. Elliott’s proposal for Duke seemingly takes that a step further by asking the company to focus not just on core tasks, but core markets.

Elliott estimates the Carolinas business could have an equity value of as much as $55 billion, while the Florida business could be worth up to $23 billion and the Midwest unit could be valued at $15 billion. Duke provides electricity to 7.8 million customers across six states.

The activist investor has made similar pushes at utilities including Sempra Energy and Evergy Inc. in recent years.

“A role that Elliott has played with utilities like Sempra and Evergy is to come in and say, ‘Your core business is the most valuable and some of these tertiary business lines actually represent a drag on value,’” said Katie Bays, an analyst at FiscalNote Markets. She added that Elliott has played a big role in financing clean energy transitions for businesses that rely on coal, an approach that could work with Duke’s business.

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