Southwest Airlines (NYSE:LUV) announced on Wednesday that it has adopted a poison pill after Elliott Investment Management pushed for changes. In finance, a poison pill is when companies increase the number of shares outstanding to make it more difficult to acquire. To implement this, the airline announced a rights plan that will be effective immediately and will expire in one year.
Details of the Rights Plan
This rights plan will issue one right per share of common stock, initially trading with Southwest Airlines’ common stock. The rights plan will become exercisable if any person or group acquires 12.5% (the triggering percentage) or more of LUV’s outstanding stock.
If the rights become exercisable, holders (except the triggering person or group) can buy shares at a 50% discount to the existing market price of LUV stock or exchange each right for one share. Current shareholders above the triggering percentage can keep their shares, but the rights may become exercisable if such a shareholder increases its ownership by acquiring more shares.
Why Did LUV Adopt a Poison Pill?
Poison pills are used to thwart hostile takeovers. Southwest Airlines adopted the rights plan after noticing that Elliott had built up an 11% stake in the company. Furthermore, Elliott has not reported its “full purported position in Southwest Airlines” on any filings with the U.S. Securities and Exchange Commission (SEC). Last month, activist investor Elliott Investment Management snapped up a nearly $2 billion stake in the company.
Elliott has also made a regulatory filing with U.S. antitrust authorities that would “provide it the flexibility to acquire a significantly greater percentage of Southwest Airlines’ voting power across two of its funds starting as early as July 11, 2024.”
Following the adoption of the poison pill, LUV’s Executive Chair Gary Kelly stated that Southwest has made efforts to engage with Elliott and remains open to value-creation ideas.
Is LUV a Good Buy Now?
Analysts remain sidelined about LUV stock, with a Hold consensus rating based on three Buys, 10 Holds, and two Sells. Over the past year, LUV has declined by more than 20%, and the average LUV price target of $27.56 implies a downside potential of 3.4% from current levels.
