Duke Rejects Elliott’s Recommendation to Split in Three

The Paul Singer-led fund argues that the utility suffers from a 'conglomerate discount,' but the company responds that 'scale is needed' to finance the company’s capital investment and growth opportunities.

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Elliott Management Corp. on Monday, May 17 formally launched a public campaign urging Duke Energy Corp. (DUK) to install new directors, hire advisers and consider breaking itself into three regionally-focused, publicly-traded utilities. Duke rejected the recommendations in a statement later in the day.

Sources told The Deal last week that the Paul Singer-led fund has acquired a stake in Duke Energy and is pushing it to add directors and possibly consider divesting some assets or make operational improvements.

On Monday, Elliott said that Duke owns one of the “highest-quality” collections of utilities franchises in the U.S. and said that it is “under appreciated.” It argued that Duke suffers from a “conglomerate discount” considering its “sprawling, noncontiguous portfolio of utilities.” It also urged Duke to install new directors and with its help lead an “unbiased review” of the proposed break- up.

In a statement, Duke said it has engaged in talks with Elliott since July 2020. It said that Elliott’s break up proposal “runs counter to the strategic direction of the entire industry at a time when scale is needed to efficiently finance the company’s unprecedented capital investment and growth opportunities.” The utility added that the proposal also “ignores the obvious capital structure and credit issues, material equity issuance requirement, dis-synergies, dividend sustainability risk, regulatory issues and overall execution risks.”

Even so, the activist fund contends that Duke’s three divisions aren’t located near each other and would be better served with executives focusing on their individual geographic regions.

The Wall Street Journal reported last week, citing sources, that NextEra Energy Inc. (NEE) had approached Delaware-incorporated Duke about buying its Duke Energy Florida unit after the large Charlotte, N.C.-based utility last year reportedly rebuffed its efforts to buy the whole company.

Elliott’s previous campaigns in the utilities and energy infrastructure space at NRG Energy Inc. (NRG), Evergy Inc. (EVRG) and Sempra Energy (SRE) suggest the fund may seek to bring on new directors and have Duke Energy set up a business review board subcommittee to examine operational or M&A opportunities.

The nomination deadline for Duke’s 2022 annual meeting is in February, which suggests that Elliott won’t nominate director candidates any time soon. Elliott said it wants Duke to find new directors “including from among candidates” the fund has identified.

In response, Duke said its board has “broad and deep experience.” The utility installed three new directors on its 13-person board at its annual meeting on May 6: ex-Public Service Enterprise Group Inc. (PSEG) CFO Caroline Dorsa, ex-Network Solutions LLC CEO W. Roy Dunbar and former Exelon Corp. (EXC) executive Michael Pacilio.

Duke director Michel Browning, who has served on Duke’s board for 15 years, also served on the board of Cinergy Corp., which merged with Duke in 2005, for 12 years previously, according to BoardEx, a sister company to The Deal.

Jonathan Arnold, an analyst at Vertical Research Partners LLC, said last week that regulatory issues could emerge if Duke were to sell its Florida utility to NextEra, even though Florida utility M&A does not generally require state approval.

Arnold added that Duke might be more willing to part with its Midwest utilities, rather than its utilities in the Carolinas or Florida, which have increased their customer count in recent years.

About the author

Ronald Orol
Senior Editor at | + posts

Ronald Orol leads coverage of activist hedge fund managers, a high-profile group of corporate investors who press for blockbuster deals and were the subject of his book “Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.” Ron produces the Activist Daily and Activist Weekly briefings, which offer exclusives, trend pieces and breaking analysis about insurgent investors and their M&A efforts. Ron also authored “Corporate Governance in the Era of Activism,” a digital handbook for CNBC’s Jim Cramer. He previously worked as a financial regulation and activism reporter at MarketWatch and Dow Jones Newswires.

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