Carl Icahn’s tender offer for Southwest Gas sets the table for a proxy fight

Enterprise: Southwest Gas Holdings purchases, distributes, and transports pure gasoline in Arizona, Nevada and California. The corporate operates in two segments, Pure Fuel Operations and Utility Infrastructure Providers. As of Dec. 31, 2020, it had 2,123,000 residential, industrial, industrial, and different pure gasoline prospects. The corporate additionally offers trenching and set up, substitute, and upkeep providers for power distribution methods, and industrial development options.

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

On Oct. 14, 2021, Icahn introduced his intention to launch a proxy contest to interchange Southwest Fuel Holdings’ (SWX) total board and to start a young supply for all widespread 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 resembling SWX takes on a brand new undertaking, the regulators analyze the corporate’s proposed prices for the undertaking and permit them an ROE primarily based on these prices. SWX’s allowed ROE is 9.35% however their precise ROE is just 7.1% versus a median of 9.2% for its friends. It’s because SWX administration reportedly pads the proposed prices to its utility initiatives with egregious private bills resembling golf memberships, massages, manicures and indulgent dinners, according to the Las Vegas Review-Journal. On multiple event, the regulators didn’t settle for these as reputable undertaking bills, thus decreasing the corporate’s ROE to 7.1%. Fixing this margin concern could be carried out with good old school activism that Icahn is aware of higher than anybody – reconstituting the board and changing the administration staff with people the brand new board will maintain accountable. It’s no coincidence that since 2015, when John Hester turned 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 carried out by bringing in a administration staff that might restore relationships with the regulators, which Icahn believes might add one other $8 per share to the worth of the corporate.

To perform his agenda, Icahn introduced his intention to launch a proxy struggle to interchange your complete board and to start a young supply for all widespread shares at $75 per share in money. That is old style, artistic activism that no one 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 widespread inventory at roughly $65 per share, the present market worth. It could now not be in line with their fiduciary responsibility to promote inventory at $65 per share after they know there’s somebody who can pay $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 struggle. Their implementation of a poison capsule (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 finally need to suggest for or in opposition to Icahn’s tender supply and it’s onerous for them to say $75 shouldn’t be a good worth when the corporate is a vendor at $65.

So how will this play out? Icahn will proceed together with his tender supply and proxy struggle however can be unable to consummate the tender supply as it’s conditioned on the corporate waiving the poison capsule, which they are going to by no means do. This leaves Icahn together with his proxy struggle. He could have an excellent thought of his possibilities 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 is not going to get the required approval of the state regulators in California, Arizona and Nevada, and (ii) by the point the regulators act, Icahn could have walked away. Within the first case, there’s a very slim likelihood Icahn’s slate doesn’t get authorised. First, these are the identical regulators which have been coping with the corporate’s expense padding this whole time and would probably welcome a brand new board that can be extra sympathetic to the charges its prospects 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 anticipate to see a really skilled and spectacular slate of administrators that may embody 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 struggle at Forest Labs, he fought two extra proxy fights within the following two years earlier than he bought the extent of board illustration he needed 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 isn’t any likelihood that he walks away right here. So, to place it one other manner, the corporate has two possibilities of avoiding a proxy struggle right here – slim and none. Nonetheless, it’s doable that the proxy struggle doesn’t occur by the subsequent annual assembly as a result of the regulatory approvals haven’t been acquired 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’s one different potential final 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 supply for the corporate, the corporate is completely in play. So, there’s a likelihood that another person is available in and makes a better supply to purchase your complete firm. It is rather probably 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 median of 13 years (happening 14), and the chairman has served as a director for nearly 20 years. The opportunity 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 will be out of a job someway, they could as properly exit promoting to the 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.