Southwest Airlines adopts 'poison pill' after Elliott Management discloses 11% stake

By Ciara Linnane

Carrier is seeking to stave off a potential hostile bid from the hedge fund run by Paul Singer

Southwest Airlines Co. said Wednesday its board is adopting a limited-duration shareholder rights plan that is effective immediately and will expire in one year.

A rights plan, also known as a "poison pill," protects companies from hostile takeovers as it forces a bidder to negotiate with the board and not directly with shareholders, enabling them to get the best deal possible.

The airline (LUV) said the move, made in consultation with advisers, comes in response to the disclosure from hedge fund Elliott Management that it has accumulated an 11% stake in Southwest.

Elliott has not reported its full purported position in filings with the Securities and Exchange Commission but has made regulatory filings with antitrust authorities that would provide it the flexibility to acquire a significantly greater percentage of the company's voting power across two of its funds starting July 11, said Southwest.

"In light of the potential for Elliott to significantly increase its position in Southwest Airlines, the board determined that adopting the Rights Plan is prudent to fulfill its fiduciary duties to all shareholders," Executive Chairman Gary Kelly said in prepared remarks.

"Southwest Airlines has made a good-faith effort to engage constructively with Elliott Investment Management since its initial investment and remains open to any ideas for lasting value creation."

The board continues to believe it has the right strategy and team in place to succeed, he added. The plan will be triggered if a person or group acquires a stake of 12.5% or more.

Elliott disclosed the roughly $1.9 billion stake in June in a letter to the board, in which it also made suggestions that it said could boost the stock by 77% within a year. The suggestions included an "upgrade" of leadership and a comprehensive review of the business strategy.

Elliott noted that Southwest's stock had lost more than half its value over the past three years, and was trading below levels seen in March 2020 when COVID-19 was declared a pandemic. The March 2020 closing low was $30.86.

"Southwest's rigid commitment to a decades-old approach has inhibited its ability to compete in the modern airline industry," Elliott said.

Management's "stubborn unwillingness" to modernize has left the airline with "outdated software, a dated monetization strategy and antiquated operations processes," Elliott said, underscored by the operational meltdown in December 2022.

For more, read: Southwest Airlines' stock surges after activist Elliott says it can soar 77%

Southwest Chief Executive Bob Jordan has said he would not step down.

Last week, Southwest lowered its second-quarter revenue guidance, citing "complexities in adapting its revenue management to current booking patterns in this dynamic environment," the company said in a regulatory filing. It still expects an all-time quarterly record for operating revenue in the second quarter.

Jordan said that the company is committed to a slew of changes, including a potential end to its hallmark open-seating policy, as it seeks to improve its performance.

The stock was up 0.9% in early trade but is down 0.9% in the year to date, while the US Global Jets ETF JETS has gained 2% and the S&P 500 has gained 15.5%.

-Ciara Linnane

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07-03-24 1032ET

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