For AT&T watchers, the tussle between Southwest Airlines and activist investor Elliott Investment Management is almost like déjà vu.
The powerhouse hedge fund went after Dallas-based AT&T in September 2019, disclosing a $3.2 billion investment. Elliott questioned the “clear strategic rationale” of AT&T operating a wide range of divisions from TV and movie studios to satellite TV offerings, demanding changes that included selling its DirecTV satellite business and Mexican wireless operations. Elliott said its plan could boost AT&T’s stock price by 65% in 29 months.
By the end of October that year, Elliott increasedits stake to $3.4 billion. The influence led to a CEO transition and two new directors.
Elliott liquidated its investment when it sold 5 million shares in 2020 and in the years since Elliott invested, AT&T is a different company. It spun off the entertainment division WarnerMedia, unloading high-profile assets such as the Warner Bros. film studio, HBO and the nascent streaming service, HBOMax, which had become a focal point as it tried to take on Netflix, Amazon and other competitors. Gone too is DirecTV, which AT&T got rid of in 2021.
Aviation News
Today, AT&T is back to its core business of selling mobile phone service, cable television and internet.
“We’re on the cusp of getting our balance sheet where it needs to be to make sure that we can sustain this business for the long term and do it effectively,” John Stankey, CEO of AT&T, said at a conference held by Goldman Sachs on Sept. 10. “And we made some bets and we’ve been investing at a level that’s higher than others in the industry and we’re bullish that we’re going to see a structural change in the need for high-quality, high improvement, high fidelity, high capability networks.”
A visit from Elliott can be an unwelcome surprise for C-suite executives at an underperforming company. Since January 2022, Elliott’s corporate activism has resulted in the ouster of 13 CEOs, including last month’s departure of Starbucks CEO Laxman Narasimhan. CEOs at Johnson Controls, Sensata, Crown Castle, Goodyear, Paypal and Pinterest have fallen prey to Elliott’s hunt for underperforming companies.
Some have called Elliott and founder Paul Singer a “vulture” using “bullying tactics” to ”loot our economy to further enrich the 1%,” as one union for AT&T workers said in 2019.
Now the hedge fund has zeroed in on Southwest, already seeing changes from the 53-year-old Dallas company such as the abandonment of its signature open seating plan. After Elliott bought a $1.9 billion stake in Southwest in June, Southwest agreed earlier this month that it would “refresh” its board of directors, with seven members stepping down, including the retirement of executive chairman and former CEO Gary Kelly in 2025.
But that’s not enough for Elliott, which would like to see Kelly retire sooner and the removal of Southwest CEO Bob Jordan.
“Their goal is to increase shareholder value, and they typically become one of, if not the largest shareholders,” said B. Lane Carrick, founder and managing director of Optima Mergers & Acquisitions, a Dallas-based middle-market transaction adviser. “They’re pretty good at engaging in a way that produces that outcome.”
From AT&T and Texas Instruments to NRG Energy and the government of Argentina, when activist investor Elliott Investment Management picks a fight, it rarely loses.
What is Elliott Investment Management?
Paul Elliott Singer has sparred with corporate titans and foreign governments since launching his hedge fund in 1977 with $1.3 million. Singer holds a B.S. in psychology from the University of Rochester and a J.D. from Harvard Law School. After seven years ofpracticing lawin New York, he began investing.
Activist investors such as Elliott put money into underperforming companies and try to improve performance for profit. Sometimes, investors remain involved after the company makes changes. Other times, they step aside and carry on to the next underperforming firm.
Singer has stacked his executive team with smart professionals, Carrick said.
Among Singer’s biggest deals are a 15-year financial war with the government of Argentina over bond payments. His firm received $2.4 billion in 2016 for bonds the government failed to pay. The hedge fund also invested in AC Milan soccer club in 2016 to stabilize its finances and try to get the club back to a sustainable operating model. Elliott later sold the team for a deal worth 1.2 billion Euros.
“I would say that they’re pretty good at getting what they want,” Carrick said. “I don’t think that, at the end of this, they’re going to walk away and Southwest is going to be unchanged.”
Forbes estimates Singer’s fortune at $6.2 billion and the billionaire has signed on to Bill and Melinda Gates and Warren Buffett’s Giving Pledge, where the world’s richest people pledge to give away more than half their fortune.
As of June 30, Elliott manages approximately $69.7 billion in assets and employs a staff of 570 people, with nearly half dedicated to portfolio management and analysis, trading and research, at its Florida headquarters and other offices located in Connecticut, New York, California and London.
Activism campaigns are ways a hedge fund like Elliott can seek opportunity to grow a profit. Elliott’s 11% stake in Southwest is not a controlling stake, but it is a substantial one that prompted Southwest to adopt a “poison pill” plan to make it harder for investors, like Elliott, to gain control of the company.
Elliott has publicly said it does not intend to do so.
“Contrary to the company’s statements, Elliott is not seeking control of Southwest,” the hedge fund wrote in a July letter.
Related:Has the LUV run out for Dallas-based Southwest Airlines?Elliott’s history in Texas
Southwest isn’t the only Texas company Elliott has invested in.
In May, Elliott wrote to the board of semiconductor firm Texas Instruments, disclosing its $2.5 billion stake, blaming the company for lagging stock market returns and overspending on massive capital projects. The company’s growth has coincided with an effort to centralize production on American soil, highlighted by a November 2021 announcement of a $30 billion complex in Sherman with four semiconductor fabrication plants that will add 3,000 manufacturing jobs in the North Texas area.
“Today, we are proposing that TI adopt a dynamic capacity-management strategy and introduce a free cash flow per share target of $9.00+ in 2026, representing a level that is ~40% above current investor expectations,” Elliott’s letter read.
Elliott’s demandsweren’t nearly as extensive as those for Southwest. By July, Elliott had written a letter of praise after a Texas Instruments earnings call commending the company for its positive shareholder engagement and capital allocation initiatives announced by Texas Instruments CEO Haviv Ilan.
Activism campaigns don’t always go so smoothly.
In January 2017, Elliott and its subsidiaries disclosed it owned about6.9% common stock in NRG Energy, a Houston-based electric company. Elliott had been eying more board candidates.
By February 2017, Elliott and another shareholder, Bluescape, had entered into cooperation agreements, a form of a settlement, with NRG Energy. Two board members retired. A new chairman was named and two new directors were named. NRG Energy also created a five-person ad hoc committee of the board — the business review committee. The company released a business transformation plan in July 2017.
Elliott isn’t a short-term investor who drives up a stock price and then leaves. The hedge fund continues to pay attention and hold companies accountable.
In May 2023, Elliott disclosed an investment of approximately $1 billion, or about 13% economic interest, in NRG Energy. It wrote to the board last year, describing how much NRG Energy had pivoted from those transformation plans.
“The purpose of today’s letter and the accompanying presentation is to present a clear path forward for how best to remedy NRG’s underperformance, building on the same framework of cost excellence and portfolio simplification that we advocated during our initial investment in the company,” Elliott wrote in May 2023. “We hope the board will consider these views, which we are making public today in the spirit of fostering a transparent and robust discussion.”
By November 2023, NRG Energy had announced a new CEO and their former CEO had stepped down.
Elliott remains involved with both Texas Instruments and NRG Energy.
Keith Gottfried, managing member of Gottfried Shareholder Advisory, called Elliott, experienced, prepared and well-advised.
“They’ve got very highly experienced counsel,” Gottfried said. “They’re not going to go away.”
Other airlines see challenges
This isn’t the first time an airline has been challenged by an activist investor wanting a seat at the table.
Just this year, Carl Icahn, the 88-year-old activist investor who goes after undervalued companies, had two board members from his firm appointed to JetBlue Airways’ board, avoiding a proxy fight. Icahn had disclosed a 10% stake in JetBlue in February.
In 2016, United Airlines bowed to an activist investor with two new board members. PAR Capital Management and Altimeter Capital Management complained the Chicago-based airline didn’t have enough directors with airline expertise. The two hedge funds disclosed they had an over 7% stake in United.
United’s stock price gained 67% in value in the year after the activist investors got involved.
Activist investors typically target companies they believe they can make money from, said Derek Zaba, co-chair for global law firm Sidley’s shareholder activism and corporate defense practice.
“This is certainly the type of campaign that (activist investors) have done in the past,” Zaba said.
Asking for theremoval of a company’s CEO and board members seems like a big ask, but it’s “become increasingly common,” Zaba said.
Zaba said typically a company and activist investor will agree on a course of action that is within the best interests of both parties. It can be very case-specific, however.
Financial services company Lazard reported an annual review of shareholder activism, revealing 2023′s global activism campaigns reached a record high of 252, 133 of which were in North America.
Elliott will remain focused on working with Southwest and other shareholders to return the airline to profitability. Southwest has said up to three of its new board members will be considered from Elliott’s slate of 10 candidates.
Southwest can appoint those new candidates, Elliott could call for a special shareholders meeting or the two could enter into a cooperation agreement.
There’s still a lot to be answeredand details on all of Southwest’s changes are expected at investor day at the Dallas headquarters on Sept. 26. Based on history, Elliott is far from done with Southwest.
“One of the fears that some shareholders, and certainly a community like Dallas, which is the home to that company, fear is a disruption of the culture and a change in a business that’s built around a service culture and a somewhat unique business model,” Carrick said. “In a perfect world, you want them to do everything in their power to retain that culture.”
Steps Southwest Airlines has already announced, including ditching a 50-year history of not assigning seats, offering a premium product and beginning red-eye cross-country flights, aren’t sufficient to improve its finances to the extent needed. That’s driving plans to eke out more revenue through changes to its route and flight network, Chief Operating Officer Andrew Watterson told employees in a video.
Letters to the Editor
Source link : http://www.bing.com/news/apiclick.aspx?ref=FexRss&aid=&tid=66f2a14c3fd74c08b6d68ab488f7867a&url=https%3A%2F%2Fwww.dallasnews.com%2Fbusiness%2Fairlines%2F2024%2F09%2F24%2Fwhen-elliott-management-calls-ceos-and-boards-listen-southwest-airlines-line-is-ringing%2F&c=4462161896340775467&mkt=en-us
Author :
Publish date : 2024-09-24 00:00:00
Copyright for syndicated content belongs to the linked Source.