Carl Icahn’s tender provide for Southwest Gasoline units the desk for a proxy battle

Enterprise: Southwest Gasoline Holdings purchases, distributes, and transports pure gasoline in Arizona, Nevada and California. The corporate operates in two segments, Pure Gasoline Operations and Utility Infrastructure Companies. As of Dec. 31, 2020, it had 2,123,000 residential, industrial, industrial, and different pure gasoline clients. The corporate additionally gives trenching and set up, alternative, and upkeep companies for vitality distribution programs, and industrial building options.

Inventory Market Worth: $4.0B ($69.18 per share)

On Oct. 14, 2021, Icahn introduced his intention to launch a proxy contest to exchange Southwest Gasoline Holdings’ (SWX) total board and to begin a young provide for all frequent shares at $75 per share in money.

The second alternative is for the corporate to enhance its margins within the regulated utility enterprise, which Icahn believes can add $15 per share. When a utility firm similar to SWX takes on a brand new challenge, the regulators analyze the corporate’s proposed prices for the challenge and permit them an ROE based mostly on these prices. SWX’s allowed ROE is 9.35% however their precise ROE is simply 7.1% versus a mean of 9.2% for its friends. It’s because SWX administration reportedly pads the proposed prices to its utility initiatives with egregious private bills similar to golf memberships, massages, manicures and lavish dinners, in keeping with the Las Vegas Overview-Journal. On a couple of event, the regulators didn’t settle for these as authentic challenge bills, thus decreasing the corporate’s ROE to 7.1%. Fixing this margin challenge might be finished with good old style activism that Icahn is aware of higher than anybody – reconstituting the board and changing the administration group with people the brand new board will maintain accountable. It’s no coincidence that since 2015, when John Hester grew to become CEO, the corporate’s G&A has gone up by 42%.

The third alternative to create worth is to extend the speed base by including sure of the corporate’s initiatives to it that regulators haven’t allowed. This may be finished by bringing in a administration group that may restore relationships with the regulators, which Icahn believes may add one other $8 per share to the worth of the corporate.

To perform his agenda, Icahn introduced his intention to launch a proxy battle to exchange your entire board and to begin a young provide for all frequent shares at $75 per share in money. That is old style, artistic activism that no person does higher than Icahn. His technique creates fairly the quandary for administration. As a part of their acquisition financing of Questar, they’re proposing elevating $1 billion by promoting frequent inventory at roughly $65 per share, the present market value. It could possibly now not be in step with their fiduciary obligation to promote inventory at $65 per share once they know there’s somebody who pays $75 per share for it. Nonetheless, they won’t promote it to Icahn as a result of it might give him an excessive amount of affect and make it a lot simpler for him to win his proxy battle. Their implementation of a poison tablet (or as Icahn calls it – “the board and administration job safety plan”) in response to Icahn’s letters clearly tells you that. Moreover, the board will ultimately need to suggest for or in opposition to Icahn’s tender provide and it’s laborious for them to say $75 just isn’t a good value when the corporate is a vendor at $65.

So how will this play out? Icahn will proceed together with his tender provide and proxy battle however can be unable to consummate the tender provide as it’s conditioned on the corporate waiving the poison tablet, which they are going to by no means do. This leaves Icahn together with his proxy battle. He may have an excellent concept of his probabilities of success relying on what number of shareholders tender shares to him. In protection of Icahn, the board is counting on two issues (i) Icahn’s slate won’t get the required approval of the state regulators in California, Arizona and Nevada, and (ii) by the point the regulators act, Icahn may have walked away. Within the first case, there’s a very slim likelihood Icahn’s slate doesn’t get accredited. First, these are the identical regulators which were coping with the corporate’s expense padding this whole time and would doubtless welcome a brand new board that can be extra sympathetic to the charges its clients are paying. Second, Icahn has owned a number of casinos prior to now and has had no drawback navigating the extra scrutinizing gaming regulatory course of. And third, Icahn will do no matter it takes to win, and we count on to see a really skilled and spectacular slate of administrators that can embrace two or three Icahn representatives at most together with skilled executives with the related skillsets to information administration. Within the second case, Icahn has proven in his historical past that he’s probably the most tenacious and dedicated activist on the market. After an unsuccessful proxy battle at Forest Labs, he fought two extra proxy fights within the following two years earlier than he obtained the extent of board illustration he wished and ended up making a 188.8% return on that funding versus a 55.2% return for the S&P500 over the identical interval. There is no such thing as a likelihood that he walks away right here. So, to place it one other method, the corporate has two probabilities of avoiding a proxy battle right here – slim and none. Nonetheless, it’s potential that the proxy battle doesn’t occur by the following annual assembly as a result of the regulatory approvals haven’t been obtained but. In that case, Icahn will ask stockholders on the annual assembly to approve a proposal to name a particular assembly of stockholders following the approval by regulators to vote on the election of the Icahn slate of administrators.

There may be one different potential end result right here. When an activist will get concerned with an organization, it typically places the corporate in pseudo-play. When that activist makes a young provide for the corporate, the corporate is completely in play. So, there’s a likelihood that another person is available in and makes the next provide to purchase your entire firm. It is rather doubtless that the corporate has been approached a number of occasions prior to now, possibly by a greater managed utility, however they’ve by no means let anybody within the door, which isn’t uncommon for entrenched boards – seven of the 9 “unbiased” administrators have served on the board for a mean of 13 years (happening 14), and the chairman has served as a director for nearly 20 years. The potential of a third-party sale will increase as Icahn will get extra shares tendered and the board sees the writing on the wall. In the event that they suppose they’ll be out of a job in some way, they could as effectively exit promoting to the very best bidder.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.