Shares of Sempra Energy (NYSE:SRE) took off on Monday, rising more than 15% at 10:30 a.m. EDT after leading shareholders Elliot Management and Bluescape Resources publicly pressed the company to undertake a strategic review.
Elliot Management and Bluescape Resources, which control a combined 4.9% stake in Sempra Energy, released a letter and presentation detailing their view that the company is significantly undervalued. They note that Sempra trades at the lowest valuation within its peer group due in part because it operates a portfolio of assets that don't fit well together. Because of that, they want the company to undertake a thorough review of its businesses to maximize the value of its assets, which could include spinning off and selling certain assets.
The two investment funds believe that these moves could help unlock an additional $11 billion to $16 billion in shareholder value, making shares worth between $139 to $158 apiece. That's 38% to 57% upside from where the stock traded before today's rally.
Bluestone and Elliot Management make a compelling case that Sempra Energy could unlock significant value by refocusing its portfolio. Further, they've had success working together to create value at NRG and FirstEnergy. They've unlocked $6 billion in value at NRG through the sale of non-core businesses and improving cash flows while FirstEnergy's stock is up 18% since they stepped up to help the company refocus on its regulated utility businesses earlier this year. While that past success bodes well for a repeat at Sempra Energy, there are no guarantees in investing, which is why investors should carefully consider Sempra on its long-term merits and not the potential for making a short-term profit by following activist investors into the stock.