Southwest Airlines just opted for a 'poison pill': find out more

Southwest Airlines Co (NYSE: LUV) opted for a shareholder rights plan or a “poison pill” on Wednesday to fend off Elliott Management. 

The activist investor currently has an 11% stake in LUV. 

Southwest stock is currently exchanging hands at just over $28 versus a higher of $35 in early March. 

How would a poison pill help against Elliott Management?

Elliott Management has announced plans of using its $1.9 billion stake in Southwest Airlines to push for a new chief executive. It lacks confidence in Bob Jordan - its current head to fix issues that have seen LUV underperform relative to its U.S. rivals. 

But the company’s board remains committed to Jordan who recently said that he doesn’t plan on retiring any time soon. 

Southwest Airlines, therefore, adopted a “poison pill” this morning that will activate if Elliott Management or any other investor acquired a 12.5% stake in the air carrier. 

If an investor crosses that threshold, the remaining shareholders of Southwest Airlines will be entitled to buy one new share of LUV for every share they already own but at a massive 50% discount. 

The shareholder rights plan enables businesses to dilute influence and voting power of an investor, which in this case, is Elliott Management. 

Elliott Management is a very successful hedge fund

Southwest Airlines opted for a poison pill today because the activist investor has already filed with the U.S. regulator to expand its stake in the New York listed firm. 

Note that Elliott Management wants to oust Gary Kelly - the chairman of LUV as well who said in a statement on Wednesday:

“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.”

Southwest Airlines stock is currently trading a little above its pandemic low. 

Elliott Management has so far refrained from commenting on today’s news. The activist investor is globally a top-rated hedge fund with over $65 billion in assets and has a history of mounting campaigns at notable names including Salesforce, AT&T, and Texas Instrument.

Is Southwest Airlines stock worth owning in July?

Southwest Airlines has underperformed its peers due to several challenges, including exceptional competition in the domestic market that it’s most focused on, delays in receiving new planes from Boeing, and inadequate investments in technology.

Last week, shares of the air carrier were hit after its management lowered the revenue guidance for Q2. LUV now forecasts revenue per available seat mile or RASM to be down up to 4.5% in its current quarter versus its previous outlook for a 3.5% decline at most.

Wall Street currently rates Southwest Airlines stock at "hold". Analysts see downside in it to $27 on average or another 5.0% decline from here.