A cold front that had nothing to do with the winter weather hitting New York settled on electric utility FirstEnergy this week, as Carl Icahn disclosed plans to build a stake in the company.
Ohio-based FirstEnergy disclosed in its annual report that it had received a letter from Icahn on February 16 stating that he was seeking permission from the Federal Trade Commission to build a position of up to $920 million. Shares rose 8% on the news, which coincided with earnings and the appointment of former gas distribution executive John Somerhalder as vice chairman, but even after that movement, the stake could be equivalent to 5% of the outstanding shares.
The move is classic opportunism from Icahn, who also raised his battle flag at Delek U.S. Holdings after the refiner was hammered by the oil price crash and pandemic last year, and Bausch Health Companies following its announcement of a strategic review.
FirstEnergy shares lost one-third of their value in July, when then Ohio House Speaker Larry Householder was arrested on a charge of racketeering in connection with a bailout of two nuclear power plants in the state. FirstEnergy wasn’t charged but has since confessed that it faces subpoenas by the U.S. Attorney’s office and the Securities and Exchange Commission (SEC). The Federal Energy Regulatory Commission and Public Utilities Commission of Ohio are also investigating. In November, the company announced it had identified a material weakness in its internal controls.
Unsurprisingly, the scandal has already cost the company’s CEO, chief legal officer, chief ethics officer, and general counsel their jobs. But with no new non-executive directors appointed in the past three years and three members’ tenure in double digits, the opportunity for a clear out is clear.
Indeed, a report from Activist Insight Vulnerability in December noted the company’s longtime underperformance, relative undervaluation, and high number of toehold stakes by activists as potential warning signs.
The Focus Of Activist Investors In The Utilities Sector
In addition, the utilities sector has been a key focus for activists over the last couple of years. In 2020, 31 utility companies were publicly subjected to activist demands, the highest number since at least 2014, according to Activist Insight Online. Activists were also very active in the sector in 2018 and 2019, with 28 and 27 companies targeted, respectively.
Icahn, while a frequent dabbler in energy, has not been involved with a utility since a run at Houston-based Dynegy that started as a takeover battle in 2010 and ended in a failed bankruptcy maneuver two years later. It would be a surprise if he followed other activists and started advocating a shift to greener sources of electricity at FirstEnergy, as some other activists have done to win the right to generate larger amounts of power from regulators, but perhaps an even bigger one if he suggested a takeover, given the six U.S. states already served by its networks.
That probably suggests a root-and-branch clear-out of the board and management, followed by a period of cost-cutting to make FirstEnergy’s debt look more serviceable. At particular risk is the company’s transmission segment, which had strong margins in 2020 thanks to its pricing power but is forecast to receive increasing amounts of capital expenditure.
Over in California, Pacific Gas & Electric has amply demonstrated the danger of neglecting infrastructure spending. In Kansas, Evergy reached a détente with Elliott Management through an agreement that had "a little something for everyone." Icahn, the ultimate winner-takes-all activist, may create some interesting dilemmas for FirstEnergy.
Josh Black, Editor-in-Chief, Insightia
The Potential Consequences Of The Capitol Attack
The February edition of Proxy Monthly is now available to read online, featuring the latest in shareholder voting intelligence. In this month’s issue, Morgan Stanley Investment Management’s executive director of global stewardship, Drew Hambly, discusses the potential impact of the Biden administration on responsible investing, and our new quarterly personnel round-up highlights the latest appointments in the investment industry.
This month’s cover feature analyzes the potential consequences of the storming of the Capitol building by pro-Trump rioters on January 6 and investors’ responses towards political action committee (PAC) contributions as a result.
Support for political contribution disclosure proposals has increased year-on-year, as investors have learnt to recognize the risks of corporate political spending. In 2015, nine proposals seeking lobbying disclosure received over 40% support, which increased to 17 in 2019, and 20 in 2020, according to Proxy Insight Online data. At the same time, however, the number of overall proposals has been falling.
Bruce Freed, the president of the Center for Political Accountability, suggests increased levels of support in the "upper 20-upper 30% range […] will often persuade companies to move within a year or so to adopt political disclosure and accountability."
A Renewed Focus On Lobbying Disclosure
Shareholders are already demonstrating a renewed focus on lobbying disclosure in this year’s annual meetings. A refiled shareholder proposal seeking disclosure of corporate spending at U.S. food processing company Tyson Foods received 17.9% support at its February 11 annual meeting, compared to 14.7% support in 2020 (management controls 70% of the votes). Lobbying proposals will also be subject to a vote later this month at U.S. engineering firm AECOM and business services provider Maximus.
The Walt Disney Co. will also face its sixth consecutive proposal of this kind at its March 9 annual meeting, which historically receives 31-39% support from shareholders. We’ll be watching the results for signs of a boost in support from the Capitol storming.
Companies are beginning to take note of investor demands for enhanced disclosure, as evidenced by the CPA-Zicklin Index, a political donations transparency analysis tool established by the Center for Political Accountability and the Wharton School’s Zicklin Center for Business Ethics Research. The number of S&P 500 companies receiving scores of 90% or higher for transparency through the CPA-Zicklin Index was 35 in 2016 but increased to 79 in 2020, with five companies, HP, Honeywell International, Edwards Lifesciences, Northrop Grumman, and Becton, Dickinson & Co, scoring 100%.
Potential developments in shareholder lobbying proposals, as well as leading asset managers’ responses to the Capitol storming, are explored in Proxy Monthly’s February edition.
Rebecca Sherratt, Corporate Governance Editor, Insightia