Southwest Gears Up for Proxy Fight With Elliott Investment

Southwest Airlines Boeing 737-800 prepares for takeoff at Los Angeles International Airport.

(Image credit: Getty Images)

Southwest Airlines (LUV) is bracing for a proxy fight with activist investor Elliott Investment Management, according to media reports. This has sparked a choppy session for its shares Wednesday.

Elliott announced plans to nominate 10 directors to Southwest's 15-member board in a bid to reshape the company's leadership, according to The Wall Street Journal. Among the proposed nominees are David Cush, former CEO of Virgin America, and former federal transportation regulator Sarah Feinberg. Elliott has also been calling for the replacement of Southwest CEO Bob Jordan and the removal of Executive Chairman Gary Kelly, the WSJ said.

"The strong qualifications of these Candidates stand in contrast to those of the current Board, which prior to Elliott's June 10 letter lacked a single independent director with airline experience," said Elliott in a statement.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

To allow for a shareholder vote on its proposed directors, the investment firm is planning to call a special meeting, which it can do considering it has an 11% stake in the discount air carrier. According to Southwest's bylaws, a stakeholder must own 10% of the company in order to schedule a special meeting.

Southwest responded to the proxy fight news by stating that its board had attempted to engage constructively with Elliott, but the activist investor "dismissed those efforts at every turn," the WSJ said. Despite this, the airline remains open to discussions and will evaluate Elliott's board nominees, it added.

Elliott unveiled a roughly $2 billion stake in LUV in early June and said it would push for changes to reverse the airline's recent underperformance. Shortly after, Southwest adopted a "poison pill," which goes into effect after a shareholder accumulates a stake greater than 12.5%.

Is Southwest stock a buy, sell or hold?

Analysts have mixed feelings on the industrial stock. According to S&P Global Market Intelligence, the consensus analyst target price for LUV stock is $25.32, which is right around where shares are trading at the time of this writing. Meanwhile, the consensus recommendation is Hold.

Financial services firm Jefferies is more bearish than the consensus, as evidenced by its Underperform (equivalent to a Sell) rating and $20 price target on LUV stock.

"Although Elliott is likely able to convene a special meeting of the LUV board of Directors, we are doubtful that the 10 proposed (still unconfirmed) board members would be supported by the current shareholder base," said Jefferies analyst Sheila Kahyaoglu in an August 13 note. "We expect investors are unlikely to vote out the current leadership without entertaining a go-forward plan, particularly as LUV's recent actions have shown a growing willingness to adapt in ways that challenge Elliott's 'stagnant' characterization."

Jefferies $20 price target sits more than 20% where Southwest is currently trading.

Joey Solitro is a freelance financial journalist at Kiplinger with more than a decade of experience. A longtime equity analyst, Joey has covered a range of industries for media outlets including The Motley Fool, Seeking Alpha, Market Realist, and TipRanks. Joey holds a bachelor's degree in business administration.