Elliott Capital took nearly a $2 billion stake in Southwest Airlines. They are seeking to replace top management and turn the airline into something closer to major competitors like American and JetBlue by charging for bags and creating basic economy fares.
To fend off Elliott Capital from gaining a controlling stake in the carrier, the airline has adopted a ‘shareholder rights plan’ – also known as a ‘poison pill’ – that would make any attempt prohibitively expensive, according to an SEC filing. This will certainly be subject to litigation.
- The Southwest Airlines Board declared a dividend of one right (a “Right”) for each share of common stock outstanding as of July 15, 2024. It significantly dilutes the ownership of any person or group that acquires 12.5% or more of the company’s common stock without Board approval.
- Any such person or group is termed an “Acquiring Person,” and their Rights will become void.
- Each Right entitles the holder to purchase one ten-thousandth of a share of common stock at a set price, subject to adjustments.
- Rights holders do not have shareholder rights (e.g., voting, dividends) until they exercise their Rights. Rights become exercisable upon the earlier of:
- Ten business days after a public announcement that a person or group has become an Acquiring Person.
- Ten business days after a tender or exchange offer is made that would result in someone becoming an Acquiring Person.
- Ten business days after a public announcement that a person or group has become an Acquiring Person.
- If a person or group becomes an Acquiring Person, other Rights holders can purchase additional shares at a discounted price, effectively diluting the Acquiring Person’s stake.
- If the company is acquired after an Acquiring Person emerges, Rights holders can purchase shares of the acquiring company at a discounted price.
- Rights expire on July 1, 2025, unless redeemed or exchanged earlier. The Board can redeem the Rights at $0.001 per Right before someone becomes an Acquiring Person.
- The Board can exchange each Right (other than those held by the Acquiring Person) for one share of common stock if a person or group becomes an Acquiring Person.
If Elliott Capital grows its ownership to 12.5%, all of a sudden everyone else will own more and they’ll own less. If this is sustained by the courts, they’re effectively capped in their ability to control the carrier.
Courts have frequently upheld poison pills as legitimate defensive measures against hostile takeovers. The board must demonstrate that the plan is a reasonable response to a perceived threat and that they are acting in good faith pursuing the best interests of the company.
Courts scrutinize whether the poison pill unduly restricts shareholder rights. If a plan is seen as an entrenchment mechanism for management, it may be struck down. Here the limited duration of the poison pill – temporary, and with clear, reasonable conditions for redemption or termination – make it more likely to be sustained.
There is one reason, and one reason only, for a “poison pill”. To entrench existing management without it having to maximize shareholder value. That is, this “shareholder rights” plan is a “destruction of shareholder rights plan”. Shareholders should throw out the current board and elect a slate that represents them.
Elliott should go elsewhere and quit trying to destroy a fundamentally good 53 year old Company. They are predators only in it for the spoils. The last thing Southwest Airlines needs is to become just another money grabbing Airline with surly employees and passengers. They have been through rough times before and they can survive these rough times as well. Southwest is not your average Airline and while there are some things that need fixing, adding fees is not the answer. Good for Southwest for making this move.
Maybe Elliott should look at Jet Blue. But wait, they already gouge their Customers.
good for WN.
Elliott and Icahn were looking for vulnerable players in the airline industry.
Icahn walked away from trying to control B6 when it was clear that B6 has a plan to turn the company around.
WN is making sure that Elliott does the same thing. By the time the poison pill is litigated, WN will have released its turnaround plan and the case would have been moot.
I hope SW goes under. Their model doesn’t work in 2024. Instead of agreeing to major changes to be more competitive and maximize shareholder value they are putting their head in the sand.
I’m buying put options as a short position. They are right behind JetBlue in a death spiral and this has nothing to do with a limited set of passengers that happen to like them.
Airfare is way too inexpensive right now. Southwest has circled the drain all the way down to the bottom feeders. I hope they fix themselves, but the odds are against them.
Hard to pay $100 for a seat on a $100mm jet and expect boom times.
AC seems to be one of those Wall Street types that we all love to hate. Rooting for the raiders, hating it when they’re thwarted.
When merger mania was happening- the LCC and emergence of ULCC carriers kept monopolies from forming and skyrocketing ticket prices.
In 2024, with much stability gained in the airline sector- the place for LCC and ULCC is dwindling. The business model developed with the low cost carriers is simply not conducive to air travel today.
My hunch, little future success for LCC and ULCC carriers and low cost fares as Elliott seems to agree. It simply doesn’t work as a business model for sustainability nor meeting customer expectations. When the price of an airline ticket is less than Greyhound or Amtrack, something is off kilter in the industry.
I expect the demise of LCC and ULCC carriers in the future and perhaps even more consolidation in the industry to keep the momentum of long term sustainability working within the industry.
Southwest perhaps better do something quickly to increase revenue and their very own survival.
Southwest can not get out of its own way. The current product has not evolved in years. Kelly and Jordan have no clue how to fix the issues with the current product . It’s time for a major change
People like AC are exactly why publicly traded companies keep going down the toilet. Prioritizing shareholders wallets over employees, customers and the long term health of the company.
Speaking strictly as someone who has shopped a lot of flights this summer, I’m baffled by those who classify WN as an ultra low cost carrier. Their fares are often equal to or more than the majors on many of the exact same routes. Maybe it’s just the routes I’ve been searching.
Gary, you might check to see if you got it correct. If each share gets to purchase 1/10,000 of another share that’s hardly any dilution at all. It means if I hold 10,000 shares, I get to buy one newly issued share.
“Each Right entitles the holder to purchase one ten-thousandth of a share of common stock at a set price, subject to adjustments. “
@David – shareholders who do not have a 12.5%+ stake do not get diluted, this dilutes Elliott Capital only
2 me, I see SWA as the most “middle class” and “egalitarian” airline. Those are nonsense concepts in 2024. I’m rooting for Private Equity here.
Normally, I would say the private-equity kids are just playing an Icahn style extortion game and will be gone after they cut a deal. However, in this case, after reading Elliott’s ppt, they make a very strong case that Southwest is operationally and managerially a “sick puppy”, and it needs serious fixing in these areas. I, as a non Wall Streeter, agree with @AC. WN’s business model no longer works in 2024 or for me (who flies 3-4 days a week).
Poison pills never end well for the BOD. It helps them survive today but they’ll get axed tomorrow.
@Tim Dunn
Icahn has in no way walked away from JetBlue!
Hostile takeovers work when the Street has lost faith in the stock, e.g., Management, smaller shareholders will vote their stock in hopes the new management will do better. New management almost always sells assets, loots the company, stock worth nada, they’ve stolen everything, and are gone. Recall Francisco Lorenzo … If SW is a ‘sick puppy’, somehow word hasn’t gotten out. Price/Earnings ratio for Delta is 6.35. For SW, 19.1!! And, then, there’s AA: “company’s current price-to-earnings ratio (TTM) is 4.58704. At the end of 2022 the company had a P/E ratio of 70.7.” If a Bear wants to take over an Airline that desperately needs help ….
@David: The key provision is the one that says, “The Board can exchange each Right (other than those held by the Acquiring Person) for one share of common stock if a person or group becomes an Acquiring Person.”
In other words, instead of each Right giving a shareholder the right to purchase 1/10,000 of a share, the Board of Directors could decide to give the shareholders (other than the Acquiring Person) a whole share instead. That’s where the dilution comes in. Southwest currently has about 600 million shares outstanding. If somebody tried to take over the company and acquired 100 million of those shares, the Board could exchange all the other shareholders’ Rights for one share of stock each, leaving the acquirer with 100 million shares and everyone else with 1 billion shares.
I suspect the point of the “1/10,000 of a share” provision is to justify the treatment of the acquirer, who would still wind up with something, albeit something much less valuable than what everyone else receives.
@Angryflyer – I am a capitalist not a moralist. I’ve invested extensively for 40 years (practically every vehicle including stocks, bonds, options, commodities and currencies). My only goal is to make money. If I see an opportunity I do it. I don’t care about the company’s products (currently have one of the largest cigarette makers in my portfolio). BTW, I have worked with private equity and other institutional investors even though I have never been in that industry. Investing is easy if you understand all the options and are willing to take a few risks.
It is people that don’t press things, are afraid to invest and leave their money in the bank that are the sad ones. Don’t blame the player – blame the game.
@Thatoneguy – FYI boards of publicly traded companies have a fiduciary responsibility to look out for shareholders. That should ALWAYS be the top thing. Sure there are times when you can align customer service (typically a component of increasing revenue/profitability) and take care of your employees (little fact as a former senior executive – even though companies give lip service to this it really isn’t a priority except to prevent turnover which costs the company money).
People that don’t understand capitalism and think it is bad for companies to maximize revenue are the ones that are truly clueless. To be successful you have to make the hard decisions and that often involves layoffs, closures or changes that adversely impact employees.
@ Gary — I don’t know which is worse — slimebag, overpaid airline executives or slimebag hedge funds trying to take control of them.
Dan
Icahn is not trying to force change because Joanne and co. made clear that B6 has a plan.
People bash Icahn but he has been far more interested in seeing change that taking over control.
WN has a plan, they said long before Elliott came along they would roll it out, and they will address the issues that are most often leveled at them – and others.
The root issue affecting WN and other low cost carriers is aircraft delivery delays due to Boeing and the Pratt Geared Turbofan and no one except those manufacturers can fix that.
Other airlines have to come up w/ plans to work around aircraft delivery delays.
If anything, WN’s greatest fault is believing that Boeing would get a solution to the MAX issues “right around the corner” for way too long.
@thatone guy:
Spot on your comment re: AC.
That idiot probably refuses to fly on Boeing. They got into that position because Phil Condit thought it smart to buy McDonnell Douglas. Along with it came Harry Stonecipher. Bottom line, he said the shareholder is the only who counts, and Boeing is on the ropes.
Successful companies build good products that customers like. Nothing wrong with profits, but not at the expense of safety and customers lives. The world is filled with AC’s. Losers all.
@Tim Dunn: That turnaround plan is capitalizded in the stock price now. It airn’t wirf nuffin!
@Texan@heart: You are right. The people who think SWA has lower ticket prices are ignorant.
A lot of blame toward Elliott and PE on here, but WN put itself in the position to be vulnerable to them. Notice Elliott and Icahn aren’t going after the likes of DL or AS for a reason. WN has left too much money on the table and ignored changing consumer preferences for too long because of its insular culture and overly “promote from within” inbred management, they set themselves up for this and seem to just now be coming to terms with doing the bare minimum to adapt.
First, I love Southwest. Seat spacing, loyalty program, free snacks and drinks – and free checked luggage too! Final price advertised and online – from the beginning. Fun, kind and nice experience, nearly all the time. Right now though, they are making very bad decisions, and they are trapped by Boeing’s debacle – without anywhere to turn as even Airbus is behind schedule in delivering planes. Southwest cut a lot of routes, so it’s hard to fly them. As a result, I had to book a 2 hour flight on Alaska recently. No seat, no luggage, no snacks (but you can buy snacks 2 weeks in advance!) — and the price quoted was before taxes, so a bit misleading on what it would actually cost. I can only hope they will provide water for free, and my knees won’t be bruised at the end. That said, and back on topic, a shareholder is a shareholder. To discriminate against them seems wrong – If I buy something, I should own what I buy and not have it diluted with others who didn’t pay my price getting more. How is that legal?? That said, I haven’t had good experiences with activist shareholders. I’m not sure if they cause a company’s death or if they are simply like vultures who have already identified the weak and dying. I suspect the later. My heart goes out to Herb Kelleher who must be crying over this. There isn’t enough Wild Turkey in heaven to keep this from breaking his heart. I suspect he is not resting in peace.
Both Jordan and Kelly are garbage and need to go but not this way. No need to keep adding management at the station level and in DAL while we don’t have the staff to turn planes. Rewarding yourself with 2 million in stock options after the disaster of 2023 proved they shouldn’t be in charge of WN. Elliott needs to take a long walk off a short pier.
Anyone rooting for a private equity firm is either invested in the firm, or incredibly uneducated.
Does WN management need to make aggressive steps to improve the airline? Of course, but Elliot won’t improve the airline. They will gut it and sell off the parts, harming tens of thousands of hard working humans. If you root for them, I hope you suffer the consequences of a similar takeover.
@Carole: ” …free snacks and drinks, etc.”. As structured, works on short flights but not long ones. Try flying with them to Hawaii and report back. Five hours, appalling food, rude, lazy staff totally unlike the cheerful people based out of Dallas.
@ Carole, Alaska has free drinks and pretzels, as well as buy onboard snacks, snack packages, and preorder food, along with 32 inch pitch, adjustable headrests, power outlets at every seat, and free WiFi for T-Mobile customers. They also allow carry ons and limited seat selection for their basic economy fare. The Alaska experience is better than Southwest’s in nearly every way unless you’re checking oodles of bags.
As a CFO, shareholder, and Southwest Airlines user, I support the adoption of a poison pill strategy to force Elliott Capital to negotiate a higher price. I question the viability of their acquisition bid. What kind of strategy “do what the mainline carrier’s do”?
While revenue optimization is important, maintaining a distinct business model is key to attracting customers. As others have commented, they aren’t cheap- gotta deliver value.
I’m a Travel Agency Owner for over 40 plus years……LOVE SOUTHWEST…LEAVE IT ALONE…..ELLIOTT should BACK OFF leave it alone.Dont need some “BEAN COUNTERS”
Screwing up the last good airline thats NOT screwing their users every flight!
From my home airport, SW is a few dollars more or the same for DEN, LAX, MDW/ORD, MSY, PHX. It is 78% more to SEA, 35% LGA (plus one stop), 36% DAL/DFW. It’s cheaper by 40% to ATL and give you a non-stop instead of a connection 9% cheaper to TPA. In all cases SW is compared to cheapest Big3 for a R/T 8Oct-15Oct. Nothing cherry picked here. No assigned seats and rarely cheaper, why fly SWA?
@AC “People that don’t understand capitalism and think it is bad for companies to maximize revenue are the ones that are truly clueless. To be successful you have to make the hard decisions and that often involves layoffs, closures or changes that adversely impact employees.” Replace “revenue” with “profit” and I agree. What many miss is the fact that many companies find that treating customers and employees well can benefit the bottom line, even if costly. Firms find there bottom line higher when they act like good citizens. The big problem is that far too many firms are willing to trade short-term profit for long-term gains. Buffet is right on this.