Southwest Airlines’ Elliott activist campaign confuses shareholders | Wilnesh News

After Elliott Management reveals $1.9 billion stake Southwest Airlines The stock’s initial gains in June quickly faded. Rather than eliciting typical cheers on Wall Street, Eliot’s campaignThe details, detailed in a 50-page briefing, caused confusion and concern among investors and customers.

this According to data, hedge funds have held active shares in more than 140 companies over the past three decades. 13D monitorhowever, like most activist investors, It was never targeted at any airline.

Southwest Airlines, a Dallas-based company that began flying in 1971, has a unique culture that has allowed it to remain profitable for decades amid the industry’s troubles.

Although the company’s profit margins are deteriorating and its stock price has declined in each of the past four years, Elliott’s Require Southwest Fire Chief Executive Bob Jordan and ousted chairman Gary Kelly have raised questions about whether the activist fully understands Southwest’s insular culture and the industry’s slow pace of change.

Elliot has not yet made public clarified the changes it wanted to make in Southwest’s product and instead asked for a business review.

“We are not entirely sure what Elliott has in mind,” analysts at Melius Research wrote in a note on June 10, the day the company launched its campaign. “We will stick with our sell rating until we know more.”

Southwest Airlines has taken steps to protect itself. On Wednesday, the airline adopted a so-called poison pill that kicks in if any shareholder acquires more than a 12.5% ​​interest, limiting Elliott’s ability to gain more control. Elliott said it currently owns about 11% of the company.

While Southwest’s latest move may spell some trouble, history offers some clues as to how this will play out. Several activist experts pointed to two of Elliott’s past targets to gain insight into the hedge fund’s strategy against Southwest Airlines: suncor energy corp. 2022 and Marathon Oil Company 2019.

Elliott partner John Pike, who currently leads the South West campaign, has been involved in the firm’s actions at two energy companies. Although Suncor and Marathon rejected Elliott’s recommendations, which included leadership changes and a review of the business, Elliott still got most of what it wanted.

Elliott’s aggressive approach has helped it become one of the world’s most successful hedge funds, with assets of more than $65 billion. The company moved its headquarters from New York to West Palm Beach, Florida, in 2020 and has only experienced losses in two years in five years. It often prompts companies to make major changes, such as selling businesses, firing senior executives, or abandoning strategic initiatives.

However, Elliott has also shown in recent years that it can work with the front office. Representatives have joined the company’s board of directors, including interest and etsi. Texas Instruments Chief Executive Haviv Ilan said in May that his company was open to “constructive dialogue” with Elliott and sales force CEO Marc Benioff said he “Nice to meet you” Elliott’s team abandoned plans to nominate directors of the software company in 2023.

In a brief response to Elliott’s speech, Southwest said it was “carefully reviewing” the hedge fund’s June 10 letter and looked forward to “further conversations with Elliott.” Southwest Airlines also said it is confident in its strategy and team and is “committed to returning to industry-leading financial performance.” Jordan said he has no plans to resign.

Pike and portfolio manager Bobby Xu are leading Elliott’s southwest campaign. Representatives from Elliott and Southwest met face-to-face in Dallas two weeks ago, according to people familiar with the matter. People familiar with the matter said discussions are still in the early stages.

The airline has tapped Bank of America Another person familiar with the matter said it was advised by law firm Vinson & Elkins.

Shares of Southwest Airlines have fallen slightly since Elliott announced its involvement, although they were up 7% on the day of the disclosure. The stock fell 5.7% on Friday to close at $26.94.

Southwest Airlines did not comment for this story.

investors are Initially wary of Elliott’s requestwhich includes the sale of Suncor’s Petro-Canada gas stations.

Little initially opposed it, but his board support evaporated when another employee was killed just weeks after Elliott announced his stake. small resignationas well as Canada’s The company quickly reached an agreement with Elliottoffered the hedge fund three board seats and acknowledged a strategic review of its Petro-Canada gas stations (which would mean a possible sale).

This is a middle-of-the-road resolution. The company decides after review Not selling its Canadian oil business. But it has also long hired an outsider as CEO Exxon Mobil manager Rich Krueger.

Elliott saw a senior position at Southwest that was equally attractive to industry executives at other airlines, according to a person familiar with the company’s thinking.

While Suncor’s efforts were victorious relatively quickly, Elliott’s experience at Marathon underscores the company’s willingness to be patient.

Elliott first increased his stake in the oil producer in 2016 and asked Marathon to “evaluate” breaking up the company. Like Suncor, Marathon conducted a review and chose to stay put, keeping the Speedway gas station as part of the business.

But in 2018, just months after striking the deal with Elliott, Marathon announced it was only going to get bigger. The company agreed to acquire rival Andeavor for $23 billion.

Elliott responded to what it saw as broken promises by resuming an aggressive campaign in 2019, securing 2.5% of new posts and claiming it would ensure the “right leadership” was in place.

“While the company assured shareholders it was conducting a comprehensive review of the Speedway business, it had an entirely different agenda,” Elliott’s Peck wrote. In a 2019 letter.

A few weeks later, Marathon organizing committee stated CEO Gary Heminger will retire and the company will eventually spin off Speedway. Elliott reportedly insisted that the board find an outsider to replace Heminger.

In March 2020, Marathon hired 38-year industry veteran Mike Hennigan as CEO. In 2020, just months after Hennigan took over, Speedway was sold to 7-Eleven’s parent company for $21 billion, and the company later announced a $7.1 billion acquisition buyback program.

Years after his triumphs at Marathon and Suncor, Elliott remains a top-five shareholder in both companies.

Elliott is now one of Southwest’s top investors. A major shareholder, Artisan Partner, expressing support for Elliott’s campaign. Southwest’s charter allows major shareholders to call a special meeting to replace the board, something Elliott may consider doing in the future, although the company has not said whether it plans to launch a proxy fight.

Regardless of whether shareholders decide to support Elliott’s move, history suggests they will benefit. According to 13D Monitor’s analysis, companies targeting Elliott tend to outperform the market. Data shows that the hedge fund holds positions for an average of two years. Elliott said his plan could help Southwest’s stock price rise 77% to $49 in 12 months.

Southwest Airlines’ poison pill rollout this week could complicate matters. It is often used by companies to fend off takeover bids. In this case, it limits Elliott’s ability to accumulate more control and shows Southwest’s management is not interested in a rollover.

inside Press release In announcing the plan, Kelly said the airline was “open to any idea that creates lasting value” but said adopting the poison pill was part of the board’s “fiduciary responsibility to all shareholders.” The measure would allow all shareholders (“other than the individual or group that triggers the plan”) to purchase shares at a 50% discount to the market price if any individual or group acquires 12.5% ​​or more of the company’s outstanding shares.

Elliott has worked on poison pill cases in the past but has not yet made clear the direction of his campaign. The company is not currently seeking specific changes that would affect things like Southwest’s baggage policy, people familiar with the matter said. Southwest is the only domestic airline that allows each passenger to check two bags for free, which is a major customer benefit, especially for those flying with family.

But updated board and operational reviews could lead to scrutiny of some of Southwest’s popular products.

Southwest has some key differentiators compared to Suncor and Marathon. First, Southwest has not made a major acquisition since. year 2011 And there are no adjacent businesses that could be spun off.

Another potential obstacle is the influence of unions, which makes it more difficult for management to implement major changes, especially when the changes involve layoffs and other cost cuts. More than 80% of Southwest’s employees belong to unions, and pilots, flight attendants and mechanics also have their own organizations. In total, workers are represented by at least 11 unions, according to union data. airline website.

Leadership of 11,000 members Southwest Airlines Pilots Association Met with Elliott’s team in Dallas in June. Labor leaders said in a message obtained by CNBC that the group conducted an “in-depth analysis” of Elliott’s “feasible plan and timeline.”

“Simply put, this has the potential to be one of the most important events in the history of Southwest Airlines,” SWAPA leaders wrote of the event.

Southwest has previously acknowledged some of the issues highlighted by Elliott, including system glitches that canceled thousands of flights and left millions of passengers stranded during the 2022 winter holiday season.

But financial challenges remain. Last week, Southwest lowered its second-quarter revenue forecast. The company noted that “adapting its business to current booking patterns in this dynamic environment is complex.”

Elliott believes this is all part of a pattern that justifies radical intervention.

“The team led by Southwest has proven to be incapable of adapting to the modern aviation industry,” Pike and Xu said in a statement. statement. “This is yet another example of the fundamental leadership change Southwest urgently needs.”

—CNBC Leslie Josephs contributed to this report.