Utility Giant SSE Eyes Network Stake Sale, Renewable Push as Activist Circles

(Bloomberg) -- SSE Plc plunged the most in more than year after the U.K. utility rejected calls for a break-up as it unveiled a green spending drive funded by a dividend cut and asset sales.

The energy company expects to sell a 25% stake of both its transmission and distribution grid assets, confirming an earlier Bloomberg report. The sale, combined with a 40% dividend cut from 2024, will fund a 12.5 billion-pound ($17 billion) increase in spending for net-zero infrastructure over the next five years.

SSE made clear that it would not be breaking up the company, despite pressure from activist investor Elliott Investment Management. The activist hedge fund, which has been meeting privately with SSE officials and other major shareholders, sees value in separating the company’s renewable portfolio from its regulated grid business.

The strategy to boost its net-zero growth may not be enough to appease Elliott’s call for a spinoff of the renewables unit, according Paul Vickars, a credit analyst at Bloomberg Intelligence. While the plan helps SSE’s credit profile, it doesn’t unlock the equity-valuation upside of a renewables IPO. 

“It’s clear that keeping the business together is core to the strategy,” Alistair Phillips-Davies, SSE’s chief executive officer said in an interview on Bloomberg TV. “We’ve got the optimal package and I think well get strong support from shareholders across the board.”

The increase in spending for networks and renewables was broadly anticipated, but investors were waiting to see how it would be funded, said John Musk, an analyst at RBC Europe Ltd. 

SSE “has confirmed market fears that this would come with a dividend cut,” he said. “We think the market may be disappointed more drastic action was not announced.” 

SSE fell as much as 7.1%, the biggest decline since March 2020. The stock is the worst performer in the Stocks 600 Utilities index on Wednesday.

The utility is hoping its new strategy will help it take advantage of strong interest in infrastructure assets and regulated utility businesses from investment funds seeking stable, long-term returns. It can then plow that money into developing its clean energy projects, which include the world’s biggest offshore wind farm. 

The company’s portfolio includes about 4 gigawatts of wind and hydroelectric power assets and the investment plan announced Wednesday will double that capacity by 2026.

Spending Plan

While SSE’s new plan shows an increased ambition for its renewables division, it’s far behind Europe’s other major green power developers. Earlier this week, RWE AG announced 50 billion-euro spending plan to 2030. Denmark’s Orsted is to invest 350 billion Danish krone ($53 billion) to 2027 and Spain’s Iberdrola plans to spend 150 billion euros by 2030.

About 80% of the renewable power spending is on projects already under construction or in development. That means the announcement is more a reflection of the company’s current portfolio than a view into what will change in the future. About 15% is for future pipeline development, which would be about 750 million pounds, with the remaining 5% on operational maintenance and lifespan extensions.

SSE’s pretax profit jumped 30% to 174 million pounds in the first half of the year. The group expects adjusted earnings of 83 pence per share for the full year, in line with analyst forecasts.

SSE said the number of retail energy suppliers failing since early September along with market volatility has increased its collateral requirements. So far, this has been met through new new letters of credit, guarantees and performance bonds with “no significant cash amounts required to date,” according to the statement.

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