Icahn Calls on Southwest Gas to Sell Its Construction Unit
(Bloomberg) -- Activist investor Carl Icahn is ratcheting up the pressure on Southwest Gas Holdings Inc., calling on the utility company to sell its Centuri Group construction business and repeating calls to abandon its recent pipeline deal.
The billionaire, who owns 4.9% of Southwest Gas, wrote in an open letter Wednesday that he believes shareholders are “fed up” with decisions by management that have destroyed value for investors.
“If SWX really wanted to improve its balance sheet, it would cancel this absurd acquisition, sell Centuri, and use a portion of the proceeds to improve the balance sheet,” Icahn said in the letter. Southwest’s arguments defending its strategic choices are “insulting to the intelligence of all shareholders.”
Southwest Gas defended its strategy in an emailed statement, arguing it offers investors an “attractive, risk-adjusted total return” across its businesses. It also defended the $1.97 billion deal to acquire the pipeline company, Questar, announced earlier this month. “The Questar acquisition adds scale and value through a compelling, high-return suite of assets with unique strength and stability,” Southwest Gas said.
Icahn has said he plans to nominate a slate of directors to replace Southwest Gas’s board, and intends to try to buy the remaining shares in the company that he doesn’t already own for $75 a share. Analysts have speculated that selling Centuri or spinning it off as a public company would also create value for shareholders. Icahn himself has said he believes the business could be worth about $36 a share.
“Management is keen on using words like ‘optionality’ to discuss Centuri,” Icahn said. “They will dangle the ‘optionality’ carrot to analysts and shareholders, buying months and quarters and years. Don’t be fooled.”
Shares in the company have been essentially flat in the past 12 months. They fell 2% to $66.94 at 3:25 p.m. in New York.
Southwest Gas, in an Oct. 13 response to Icahn, said it has delivered shareholder returns comparable to or better than its peers since February 2020, just before the coronavirus pandemic.
But Icahn argued that focusing on this period is “nonsensical” because 30% of its business is in the construction division, whose peers have tripled in value over the same period. That implies the regulated utility business has “meaningfully underperformed” its peers. Starting from that point would also ignore its underperformance in 2019, he added.
“If you want to pick a short time period to examine, we suggest more recent history,” Icahn said. “The stock fell when the deal was leaked. The stock increased when we announced our opposition. The stock fell when the deal was formally announced.”
He said he didn’t believe the company’s claims that the Questar acquisition was compelling or in the best interest of shareholders. He’s argued Southwest Gas is overpaying for the company and has been particularly critical of the up to $1 billion in equity and equity-linked securities the company intends to sell to help finance the transaction.
“We believe that SWX stockholders want to invest in a regulated utility; not a daily trip to the casino placing ratepayer money on lucky 7,” he said. “Stockholders did not vest the officers and directors of SWX with the authority to run an unchecked investment company with a portfolio of unrelated assets, certainly not by diluting shareholders in order for management to further entrench themselves in their overpaid jobs while underperforming their competitors.”
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