Dan Loeb has been my favorite hedge fund manager ever since his campaign against Warnaco, during which he famously compared Warnaco's CEO to Burt Reynolds’ character, the pornographic producer, in the film "Boogie Nights.”
Loeb is now making a run at Shell, arguing for breaking Shell up into "multiple standalone companies:
For example, a standalone legacy energy business (upstream, refining and chemicals) could slow capex beyond what it has already promised, sell assets, and prioritize return of cash to shareholders (which can be reallocated by the market into low-carbon areas of the economy). A standalone LNG/Renewables/Marketing business could combine modest cash returns with aggressive investment in renewables and other carbon reduction technologies (and this business would benefit from a much lower cost of capital). Pursuing a bold strategy like this would likely lead to an acceleration of CO2 reduction as well as significantly increased returns for shareholders, a win for all stakeholders.
Ann Lipton has a post discussing the issues raised. She points out that:
Shell argues – and apparently some of its large investors agree – that you can’t split them up that easily. Part of the claim has to do with how the different sides of the business are integrated, and part of it has to do with cash flows, namely, that the brown assets are funding the green ones. As Matt Levine points out, though, investors themselves could do that if they wanted to – they could take the cash they make from the brown assets and plough it back into green investments ....
This strikes me as plausible. It's basically the same argument that was made to show why conglomerate mergers are value destroying; namely, that diversification at the investor level will almost always be superior to intra-company diversification.
The even more interesting and provocative part of Ann's post, however, is her argument that Loeb is purporting "to appeal to ESG strategists and possibly take a leaf out of Engine No. 1’s playbook." As she explains, however, "that’s actually not the strategy at all. Loeb is in no way trying to make energy 'greener.'"
All of this relates to the question of whether traditional shareholder activists like Loeb are going to advance or oppose the ESG movement. Count me as dubious.
