Spectra Energy Activist Shareholder Sandell Urges More Steps

Spectra Energy Corp., the U.S. pipeline owner that yesterday promised to sell U.S. assets to a partnership it controls, is under pressure to do more after activist investor Sandell Asset Management Corp. said it amassed a stake, according to documents obtained by Bloomberg News.

The company should also explore strategic alternatives for Westcoast Energy Inc. and DCP Midstream LLC, including potential initial public offerings, and cut operating costs to increase returns for shareholders, Sandell Asset said in an e-mailed presentation to Spectra last month. Taking all the recommended steps may increase Spectra’s share price to between $41 to $48, according to the presentation.

Spectra, with a market capitalization of more than $22 billion, had its biggest intraday gain since trading began six years ago, climbing 11 percent to $33.68 at the close in New York. The Houston-based company was the best performer on the Standard & Poor’s 500 Index today following last night’s announcement that it would transfer assets to Spectra Energy Partners LP by year-end.

Sandell Asset and Spectra executive management held a May 21 call to discuss the proposals, according to a person familiar with the matter, who asked not to be identified because the talks were private. Sandell asked the company to respond within three weeks, the person said. The investment firm founded by billionaire Thomas Sandell has formed a shareholder group that is among Spectra’s 10 biggest owners, according to the presentation sent May 16.

Valuation ‘Mismatch’

“We are open to constructive dialogue with all shareholders and will continue to review and consider ideas that may create additional value,” Caitlin Currie, a Spectra spokeswoman, said in an e-mail.

Patrick Clifford, a Sandell Asset spokesman who works for Abernathy MacGregor Group, declined to comment. Sandell Asset held at least 2.3 million shares as of March 31, according to data compiled by Bloomberg.

In March, the Houston-based company acquired its first oil pipeline from Kinder Morgan Energy Partners LP and two Canadian pension funds for $1.25 billion. Spectra, led by Chief Executive Officer Gregory Ebel, generated $5.1 billion in revenue last year from its gas pipeline network.

The company’s decision to transfer all its remaining transmission and storage assets to the master-limited partnership will help boost dividends, Spectra said yesterday. An MLP doesn’t pay corporate income tax, leaving more cash for payments to investors.

“There is a mismatch of valuations between components of Spectra and what the market is paying for Spectra,” Nathan Judge, a London-based analyst for Atlantic Equities LLP who rates the company the equivalent of a buy, said today in a phone interview. “Whether the best way to realize that is through novel ways of dropping down assets into an MLP or other things is to be debated.”

(Updates with closing share price in third paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE