For business: Southwest Gas Holdings Natural gas is purchased, distributed, and transported in Arizona, Nevada, and California. Natural Gas Operations is one segment, while Utility Infrastructure services is another. It had 2123,000 customers in natural gas operations as of December 31, 2020. This company provides services such as trenching, replacement, maintenance, and trenching for energy distribution and industrial construction systems.

Stock Market Value$19.18/share

Continue reading Oct. 14, 2021Icahn declared his intent to start a proxy contest in order to replace Southwest Gas Holdings (SWX’s) whole board. He also announced that he would begin a tender offering for all common shares at $75 each share in cash.

Icahn thinks that the second chance is to increase the margins of the company’s regulated utility business. This can bring in $15 per share. A utility company like SWX will take on a project. The regulators review the proposed cost of the project and give an ROE. SWX has an ROE allowed of 9.35%. However, their ROE actually stands at 7.1%, compared to 9.2% among its peers. The reason for this is that SWX’s management apparently covers the utility project costs with outrageous personal expenses like massages, manicures, golf memberships, and lavish dinners. according to the Las Vegas Review-Journal. These were not accepted by regulators on more than one occasion. This resulted in a reduction of 7.1% in the ROE. Fixing this margin issue can be done with good old-fashioned activism that Icahn knows better than anyone – reconstituting the board and replacing the management team with individuals the new board will hold accountable. It is no coincidence that since 2015, when John Hester became CEO, the company’s G&A has gone up by 42%.

Third, you can increase your rate base and add certain projects to the company that have been denied by regulators. This is another way to generate value. You can do this by hiring a management team to repair relations with regulators. Icahn thinks that it could increase the company’s value by $8 per share.

Icahn declared his intent to start a proxy battle to replace the board, and to begin a tender offering for common shares at $75 each in cash. Icahn does this with old-fashioned, creative activism. Management is in a quandary because of his strategy. They propose to raise $1 billion through the sale of common stock, at $65 per share. This is in addition to their purchase financing for Questar. They cannot continue to be in compliance with their fiduciary obligation by selling stock for $65/share when there are people who would pay $75 per share. But they won’t make Icahn sell the stock because it will give him too many influence and make it easier to win his proxy battle. Their implementation of a poison pill (or as Icahn calls it – “the board and management job protection plan”) in response to Icahn’s letters clearly tells you that. Icahn will also be referred to the board for their recommendation. They must decide whether $75 is fair or not, especially when Icahn is selling the company at $65.

How will it all play out? Icahn’s tender offer will go ahead as usual. However, the proxy battle will end and Icahn won’t be able close his deal. The tender offer was contingent on Icahn waiving their poison pill. This they have never done. Icahn now has to continue his proxy fight. The number of shareholders who tender shares will determine his success chances. Icahn can be defended because the board relies on two factors: (i) Icahn’s slate will not receive the approvals of state regulators in California and Arizona; and (ii), Icahn will have fled by the time regulators act. The chance of Icahn’s slate not being approved is slim in this first case. First of all, the regulators have had to deal with expense padding for the entire company and are likely to welcome a new board who will be more understanding about what rates customers are paying. Icahn also has experience with managing casinos and is well-equipped to navigate the increasingly complex regulatory environment. Icahn is determined to win. We expect to have a highly experienced slate of directors, including two to three Icahn executives, as well as experienced managers with the appropriate skills to lead management. Icahn demonstrated in the past that he is a tireless and passionate activist. After an unsuccessful proxy fight at Forest Labs, he fought two more proxy fights in the following two years before he got the level of board representation he wanted and ended up making a 188.8% return on that investment versus a 55.2% return for the S&P500 over the same period. It is unlikely that he will walk away. So, to put it another way, the company has two chances of avoiding a proxy fight here – slim and none. The regulatory approvals are still not received so it’s possible the proxy fight will not take place at the annual meeting. Icahn, in this case will request stockholders approve a proposal that a special meeting be called by stockholders after the regulatory approvals have been received to vote for the Icahn slate.

Another outcome is possible. An activist can often get involved in a company’s affairs. This puts it in dangerous play. The company can be put in complete play if the activist offers to buy it. It is possible that an outsider will make a better offer and buy the whole company. It is very likely that the company has been approached several times in the past, maybe by a better managed utility, but they have never let anyone in the door, which is not unusual for entrenched boards – seven of the nine “independent” directors have served on the board for an average of 13 years (going on 14), and the chairman has served as a director for almost 20 years. As Icahn receives more shares, the possibility of Icahn selling to a third party increases. It is a good idea to sell to any person who believes they may be losing their jobs.

Ken Squire founded 13D Monitor and is its president. The institutional research company focuses on shareholder activism.