DALLAS - Southwest Airlines Co. (NYSE: NYSE:LUV) has initiated a limited-duration shareholder rights plan, effective immediately, set to expire in one year, with any extension subject to shareholder approval. This move comes following Elliott Investment Management L.P.'s accumulation of a substantial economic interest in the airline's common stock.
The Board of Directors, after consulting with its advisors, decided on the rights plan as a countermeasure to Elliott's announcement of an approximate 11% economic interest in Southwest Airlines. Elliott has yet to report its complete purported position through SEC filings, although it has made regulatory filings with U.S. antitrust authorities to potentially acquire a greater percentage of Southwest's voting power, which could begin as early as July 11, 2024.
Gary Kelly, Executive Chairman of the Board, stated that the adoption of the rights plan is a prudent step to protect the interests of all shareholders in light of Elliott's possible increase in its stake. He affirmed the company's commitment to constructive engagement with Elliott and emphasized Southwest's focus on restoring its leading financial performance.
The rights plan aims to prevent any single person or group from gaining a disproportionate amount of control over the airline without adequately compensating shareholders. Shareholders will receive one right per share of common stock, which becomes exercisable if someone acquires more than 12.5% of outstanding common stock.
Rights held by others would allow them to buy common stock at half the market price, while the rights of the person or group exceeding the threshold would become void.
Current shareholders owning more than the triggering percentage may retain their shares without triggering the rights plan unless they buy additional shares. The plan does not prevent the board from considering fair offers that serve the company's shareholders' best interests.
Southwest Airlines has filed details of the rights plan with the SEC on Form 8-K. Bank of America Securities, Inc. and Morgan Stanley & Co. LLC are financial advisors to Southwest, with Vinson & Elkins L.L.P. and Kirkland & Ellis LLP providing legal counsel.
The information in this article is based on a press release statement from Southwest Airlines Co.
In other recent news, Southwest Airlines has adjusted its second-quarter revenue outlook, expecting a decrease of 4% to 4.5% in revenue per available seat miles (RASM), a key indicator of an airline's efficiency and financial health. This adjustment comes in response to fluctuating travel demand in the post-pandemic landscape.
Barclays has maintained its Equal Weight stance on Southwest, with a $26.00 price target, and adjusted its fiscal year 2025 earnings per share (EPS) estimate for Southwest to $1.60, down from the previous $1.80 forecast. Meanwhile, Citi has maintained its Neutral stance on Southwest, raising its price target to $29 from the previous $27.50.
Activist investors, including Elliott Investment Management, have launched a record number of campaigns against global companies, including Southwest, in the first half of 2024. Despite the increased activity, these investors have been less successful in gaining board seats. Elliott has voiced concerns over Southwest's repeated downward adjustments to its revenue guidance and has called for leadership changes within the company.
The U.S. Treasury Department recently raised $556.7 million from the sale of warrants in 11 major airlines, including Southwest, which were originally issued as part of the government's COVID-19 relief efforts.
These are some of the recent developments impacting Southwest Airlines.
InvestingPro Insights
Amid the strategic maneuvers by Southwest Airlines Co. (NYSE: LUV) to protect shareholder interests, the company's financial health and market performance are pivotal for investors to consider. With a robust market capitalization of $16.93 billion, Southwest Airlines stands as a significant entity in the airline industry. Notably, the company's balance sheet reflects a position of strength, holding more cash than debt, which is an encouraging sign for investors monitoring the company's financial resilience.
Investors should be aware that Southwest Airlines is trading at a high earnings multiple, with a Price to Earnings (P/E) ratio of 42.76. This could suggest a premium valuation compared to the industry average. However, looking at the adjusted P/E ratio for the last twelve months as of Q1 2024, the figure is more grounded at 19.52. This adjusted metric may provide a more current perspective on the company's valuation.
From a profitability standpoint, Southwest Airlines has been successful over the past year, and analysts predict the company will remain profitable this year. This is a crucial aspect for shareholders, especially in an industry that has faced significant headwinds in recent times. Additionally, the company's prominence as a key player in the Passenger Airlines industry cannot be understated, as it continues to navigate through the competitive landscape.
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