NRG Urged to Shake Up Strategy Following ‘Worst Deal’ of Past Decade
Elliott Investment Management LP is calling on Houston-based utility giant NRG Energy Inc. to upend its strategy because of “operational and strategic mishaps.”
The activist investor, which said it has spent $1 billion to secure a 13% stake, sent a letter on Monday to NRG’s board specifically criticizing a $2.8 billion deal to buy home technology company Vivint Smart Home Inc. The purchase, which recently was completed, was not aligned with NRG’s strategy, according to Elliott.
Elliott in a letter and materials sent to the board, said it was presenting “a clear path forward for how best to remedy NRG’s meaningful underperformance and create significant and sustainable value.”
It’s not the first time Elliott has butted heads with NRG management. In 2017, the activist investor called for a strategic overhaul. Subsequent engagement with the board “catalyzed the highly successful transformation plan and resulted in NRG becoming the best-performing stock in the S&P 500 in that year.” NRG settled with Elliott by appointing two board members and revising its business plan, which included selling assets and reducing debt.
Since then, however, NRG “has meaningfully underperformed due to a number of operational and strategic missteps,” according to Elliot.
Among the miscues was the acquisition of Vivint, first disclosed in December. Measured by the one-week market reaction following the announcement, the Vivant deal “was the single worst deal in the power and utilities sector in the past decade,” according to Elliott.
The investor said NRG needs to add independent directors with energy experience and improve operations. NRG also is being urged to cut recurring costs by “at least $500 million.”
A “strategic review” of the home services strategy, including Vivint, also is requested.
“In conjunction, establish a new capital allocation framework to return to shareholders at least 80% of free cash flow, with growth investments focused on its generation and retail businesses,” Elliott stated in its letter.
NRG did not provide a detailed response, but said it remained “committed to creating shareholder value and appreciates Elliott’s interest. The company welcomes all shareholders’ input and looks forward to an open dialogue with Elliott.”
During a conference call earlier this month to discuss NRG’s first quarter results, CEO Mauricio Gutierrez discussed Vivint’s impact since the transaction was completed.
“While we have only owned Vivint for one month, I want to provide their full first quarter statistics for comparison,” Gutierrez said. “Vivint grew customers by 9% and revenue by 14%, compared to the same period last year.”
According to Gutierrez, “Vivint brings a complementary business that expands our customer network by nearly 40% and adds smart home technology and infrastructure to strengthen our platform. Together, we create the leading essential home services provider in North America, serving a network of nearly 7.5 million customers…
“In the medium and long-term, I see even more opportunity to create value through growing customer count nationally, increasing the average number of solutions per customer, and materially expanding the customer lifetime.”
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