Yahoo Finance Southwest Air Adopts Poison Pill to Counter Activist Elliott
(Bloomberg) -- Southwest Airlines Co. has adopted a shareholder rights plan to defend against a push for a leadership overhaul by activist firm Elliott Investment Management.
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Commonly known as a “poison pill,” the plan aims to dissuade what Southwest called “de facto or negative control” of the airline without compensating other shareholders, the airline said in a statement Wednesday. It comes after Elliott in June disclosed a $1.9 billion stake in the airline and demanded new leadership and a revamp of Southwest’s business to better compete with other carriers.
“The board determined that adopting the rights plan is prudent to fulfill its fiduciary duties to all shareholders,” Southwest Chairman Gary Kelly said in the statement. The airline has made “a good faith effort to engage constructively” with Elliott since its initial investment, he said.
Southwest said Elliott had built an economic interest equal to about 11% in the carrier, and had not reported its full position in securities filings. Elliott declined to comment on Southwest’s action.
Southwest will issue one “right” for each share of common stock under the plan, which runs for one year. When a shareholder or group of investors accumulates 12.5% or more of Southwest’s common stock, holders of those rights will be allowed to purchase additional Southwest shares at a 50% discount to the carrier’s then-current share price, according to the statement.
Rights held by a person or group holding 12.5% or more of Southwest would become void, the carrier said. The strategy could make it prohibitively expensive for Elliott to expand ownership and also dilute its stake in the company.
Southwest rose 1% in a shortened trading session in New York on Wednesday. In the last year, the stock had dropped 24% through Tuesday’s close, compared with a 24% increase in the S&P 500.
Investor Frustration
Southwest faces mounting frustration from some investors over the company’s lagging financial performance and insular corporate culture. The carrier cut its second-quarter outlook for unit revenue as it contends with moderating demand for US domestic leisure travel after a major rebound following the pandemic.
Chief Executive Officer Bob Jordan has rebuffed calls for leadership change, saying he has no plans to resign. He and Kelly were specifically criticized by Elliott for poor execution and “a stubborn unwillingness to evolve the company’s strategy.” Elliott said Southwest had “written off” sources of revenue that rivals across the industry have adopted during the past 15 years, including offering a bare bones basic economy fare, charging customers for checked luggage and assigned seats.
Jordan has signaled that Southwest is unlikely to drop its “bags fly free” policy because it’s the only US carrier that allows passengers to check two bags at no cost. Surveys have shown a significant portion of customers choose Southwest because of that policy, he said.
Still, the carrier in April said it was taking a serious look at possible changes such as premium seating and new boarding procedures that it plans to unveil at a September investor meeting.
Critics have said broad changes Elliott would likely make could ruin Southwest’s brand and alienate longtime customers who favor its unassigned seats and one-class passenger cabin. But Elliott has called for immediate change — including new leadership from outside the airline — that would allow the carrier to update investors on a go-forward strategy by year-end.
Elliott, led by Paul Singer, is one of the world’s most active boardroom agitators. The firm had already launched campaigns at companies with a combined market value of about $100 billion this year — including at UK-listed miner Anglo American Plc and Japanese trading house Sumitomo Corp.
Activist investor Carl Icahn took a stake in JetBlue Airways Corp. earlier this year and obtained two board seats at the carrier.
--With assistance from Crystal Tse.
(Updates with Elliott response in fourth paragraph.)
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