Activist Meister eyes up another possible conglomerate break-up to unlock value

MDU Sources is a regulated vitality supply and development supplies and providers enterprise. The corporate is organized into the next 4 enterprise segments: (i) utilities: electrical and pure gasoline distribution, (ii) pipeline, (iii) development supplies and contracting (their aggregates enterprise), and (iv) development providers.

Inventory Market Worth: $6.3 billion ($31.20 a share)

Proportion Possession: 5.5%

Common Price: $26.57

Activist Commentary: Corvex was based in 2011 by Keith Meister, Carl Icahn’s former lieutenant who served as CEO and vice chairman of Icahn Enterprises. Corvex is a extremely concentrated, essentially pushed hedge fund that makes use of activism as a software, however not a main technique. Their choice is to not be activist, with a proxy struggle being a final resort, and would favor to amicably be invited on Boards.

Corvex expressed its assist for the corporate’s just lately introduced resolution to separate Knife River development supplies by a tax-free spinoff to shareholders. Moreover, Corvex intends to enter into discussions with the corporate’s board and administration to debate: (i) extra strategic alternate options to additional maximize shareholder worth and (ii) plans to boost the earnings potential of the corporate’s property to ranges according to trade friends.

MDU operates in a conglomerate construction with utilities, pipeline, development supplies and contracting, and development providers. Its utilities enterprise operates in eight states — North Dakota, South Dakota, Idaho, Washington, Montana, Oregon, Wyoming and Minnesota, and relying on the state makes someplace close to 10% contracted revenue on its prices.

This activist marketing campaign is all about pure play and ease. One want look no additional than Corvex’s 2020 activist marketing campaign at utilities firm Exelon to see that. At Exelon, in October of 2020 Corvex acknowledged that the corporate trades at a reduction with a 30% inventory upside due to its diversified enterprise construction and that pure play, regulated companies obtain premium valuations. The inventory was buying and selling at $39.32 then.

Six months later, Exelon introduced that it’s going to spinoff Constellation Vitality Corp. In February of 2022 when the spinoff was accomplished the inventory was buying and selling at $42 per share. Exelon shareholders acquired $16.50 of worth as of the spinoff cut-off date and $25 value of worth as of immediately’s worth from their Constellation holdings and never solely did Exelon shares not drop, however they’re buying and selling at $46 per share immediately. Corvex is probably going pursuing the same recreation plan right here. 

These are all good companies that alone must be 20 occasions earnings’ companies, however collectively they commerce at a reduction as a result of conglomerate construction. The corporate took step one in pursuing this worth creation alternative final week after they introduced that they might be spinning off their aggregates enterprise, Knife River Corp, which is predicted to be accomplished in 2023.

Nonetheless, it’s not clear if this was the corporate taking step one in a bigger plan to interrupt aside its conglomerate construction or whether or not they have been placating an activist who has been shopping for inventory for a while now. It’s fascinating to notice that that the corporate retained JP Morgan, PJT Companions, Joele Frank and Wachtell Lipton in reference to that spinoff transaction. These are all prime advisors in defending towards activists and signifies that the corporate may be gearing up for a struggle reasonably than initiating the start of an agreeable plan.

If the corporate is preparing for a struggle, there isn’t a doubt that Corvex will deliver one if it can’t amicably settle with the corporate. However they’ve quite a lot of time to attempt to come to an amicable settlement with the nomination window not opening till January 10, 2023. What Corvex could be in search of is the divestiture of the development providers phase and a few type of board illustration to assist administration extra effectively function the enterprise. That is much like what Carl Icahn, Meister’s former mentor, is doing at Southwest Gasoline. This plan might lead to a $45-plus inventory worth at MDU in an funding that has important draw back and inflation safety as a rate-based utility.

There may be additionally an Activist ESG (AESG) thesis right here. The corporate’s vitality technology is at present divided into three areas: coal, pure gasoline and renewables. Nonetheless, as gear and amenities depreciate, they will not be included within the price base and the corporate can’t receives a commission on them. So, firms like MDU will shut amenities and retire gear and construct new amenities and purchase new gear that may be added again into the speed base.  The development within the trade is in the direction of extra environmentally pleasant property. So, whereas MDU presently is roughly one-third coal, one-third pure gasoline and one-third renewables, in 2010 the corporate was solely 11% renewables.

Lastly, it must be famous that Corvex filed its 13D with a 4.99% possession and 0.59% money settled swap publicity. Like Icahn in Southwest Gasoline, there might be state restrictions that prohibit a shareholder of a utility from buying 5.0% of widespread inventory. To get the financial publicity they needed, Corvex used money settled swaps and it’s commendable that they disclosed this in a 13D submitting. We regularly see activists utilizing money settled swaps as a grey space and loophole to keep away from exceeding a 5% useful possession threshold which requires a 13D submitting, and consequently that is now the topic of an SEC proposal. It’s refreshing to see an activist like Corvex err on the facet of transparency right here and point out that they aren’t on this to play video games however overtly work with administration to create long run shareholder worth.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and he’s the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire can be the creator of the AESG™ funding class, an activist funding model centered on bettering ESG practices of portfolio firms.