Dive Brief:

• A pair of investors holding a 4.9% interest in Sempra Energy say the company is "deeply undervalued" and have presented a strategic plan to focus the company on distribution utilities and liquefied natural gas, seeking to raise its valuation by $11 billion to $16 billion.
• Elliott Management and Bluescape Resources want the company to consider selling Sempra's international assets and renewable energy division, as well as add six new members to "refresh" the board.
• The two investors have a history of helping bring change to energy companies. Earlier this year the pair invested in FirstEnergy to help the company ditch its merchant generation, and forced changes to the board of NRG Energy last year.

Dive Insight:

According to Elliott and Bluescape, as the size of Sempra Energy's enterprise has grown, so has the company's valuation gap. 

"This persistent and substantial undervaluation stems from a focus on sheer size that has permeated management and Board thinking," Elliott and Bluescape leadership said in a letter to Sempra's board. "This has led to the creation of a conglomerate structure consisting of disparate businesses grouped together with no compelling strategic or financial rationale."

The proposal would shed several business units and turn Sempra's focus to two areas: distribution utilities and liquefied natural gas. Up for sale would be energy companies in Mexico, Peru and Chile, along with Sempra Renewables, which has 1.66 GW of long-term contracted wind and solar capacity.

They estimated the sale of wind and solar assets at $1,500/kW to 1,650/kW change-of-control value, minus a $631 million non-controlling interest.

Remaining would be distribution electric utilities Southern California Gas and San Diego Gas & Electric in California, as well as Oncor Electric in Texas, which Sempra bought this year. On the LNG side, the company would retain stakes in Cameron LNG, Port Arthur LNG, and Sempra LNG & Midstream.

Sempra Energy has traded near $100/share recently, but news of the proposal sent the stock up 15%. Bluescape and Elliott say their plan could result in stocks rising to $139/share to $158/share.

Sempra issued a statement in response to the letter and presentation, saying it is "committed to an open dialogue with all shareholders and considers investor perspectives in the context of the company’s existing strategy and opportunities to deliver long-term shareholder value."

"Our board and management will review their letter and presentation in detail and respond in due course."

Along with the international energy assets, the renewables business is "attractive but noncore," the investors say.

Elliott and Bluescape called their plan a “back to basics” approach.

"This more focused approach will enable Sempra to unlock capital to reinvest locally in critical infrastructure with no net increase in utility customer rates," they said.

The investors also recommend padding the board with more industry experience, noting that only three of Sempra's 12 independent directors currently have utility industry experience.

"The Board today lacks key industry and capital allocation know-how and credibility," the investors wrote in their presentation.