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Carl Icahn isn't always brimming with cheer, but at this particular moment he was distinctly unhappy.

It was a Sunday, early in October, and Icahn had slowly been building up a stake in Las Vegas utility Southwest Gas Holdings, quietly amassing around 5% of the company. Icahn correctly believed that the market was giving Southwest’s stock zero value for the excellent Centuri energy construction unit. Icahn hadn’t pounced yet, but he was poised to start pressuring Southwest to sell Centuri and greatly improve operations at its core utility.

Instead, on Oct. 3, a bombshell leak revealed that Southwest was planning another big acquisition, in yet another business. Southwest had reached a deal to purchase Questar Pipeline from Dominion Energy for around $1.55 billion in cash, a price 20% higher than Warren Buffett had agreed to pay before abandoning the deal months earlier.

Till that day in October, Icahn had never spoken to Southwest CEO John Hester, and the company was apparently unaware that the legendary activist was amassing a position. So appalled was Icahn that he raced to stop the deal before an official announcement. As Icahn told me, “I kept calling Hester’s office for three days, and his assistant kept saying, ‘He’s out to lunch.’

“I said to her, ‘You’re so right about that, he sure is out to lunch.’”

The same day, Icahn issued a scathing letter that for the first time publicly disclosed his Southwest holdings and left no aspect of Southwest’s performance unscorched. It called the Questar deal yet another “egregious error at the expense of shareholders” that made “all past errors pale by comparison.” He took management to task for “l(fā)etting expenses balloon” and allegedly antagonizing regulators by padding expenses for the likes of “boozy dinners,” “manicures,” and “million dollar homes.” Icahn charged that poor day-to-day management and the strategy of buying “unregulated” assets when peers were divesting all but core operations led to shares being undervalued by at least 40%.

Over a series of interviews, Icahn took Fortune inside his latest takeover battle, demonstrating the tools, tricks, strategies, and maneuvers that have made him arguably the most renowned, and feared, corporate activist on Wall Street. The founder of industrial conglomerate Icahn Enterprises (market cap: $15 billion) is 86 now, and while he’s an old hand at activist investing, industry veterans say this marks the first hostile takeover attempt of a public utility since prior to the Great Depression, when such titans as Samuel Insull and J.P. Morgan led winning attacks on sundry utilities, gathering the conquered into some of America’s first giant holding companies. Activists have had good reason to steer clear of utilities in the century since: In this industry where state authorities establish allowable rates and returns, an unwanted buyer faces a tough climb in convincing shareholders that they can run things a lot better than the current crew. An invader is also risking that its acquisition drive won’t clear the high regulatory hurdles needed to take full control.

Icahn’s battle with Southwest offers a unique perspective on this highly contentious corner of capitalism, where a lone investor lobs verbal hand grenades while simultaneously proffering a vision of a more profitable future to shareholders. The target company must skillfully play defense, while also trying to outflank the aggressor. Icahn now owns a 4.9% stake in Southwest, and he’s launched a tender offer at $82.50 per share for any and all the remaining stock. So far, investors have tendered around 20% of their shares to Icahn, potentially bringing his total position so far to roughly 25%.

But as this fight unfolds over the next month when Southwest will release the proxy results on May 12, it’s clear this is about more than just money or power. For Icahn it’s a bold way to demonstrate that his strategies honed over six decades are still relevant, while for Southwest it’s a fight to keep control over the company—and for those at the top, their jobs.

Miami vice

On March 29, I spoke at length by phone with Icahn and Andrew Teno, a portfolio manager for Icahn Enterprises who serves on several boards where the boss is a major shareholder, and who’s a candidate for a seat at Southwest in the proxy contest. They were speaking from Icahn’s headquarters on the top two floors of an office tower north of Miami. Last December, I met the bearded legend, whom lieutenants call “the chief,” in his office of framed glass that features sweeping ocean views and a mini gallery of paintings by Monet and Renoir. “There’s no semblance of corporate governance at Southwest,” Icahn charges on the call. “It’s like a dictatorship…That’s why it’s so crucial we take over the board. Otherwise, they’ll just continue on their acquisition spree.”

He’s particularly incensed by Southwest’s biggest countermove to date: Last fall it adopted a “poison pill” that limits Icahn to a 9.9% stake in the company. Icahn could double his holdings after the tender expires on April 22. But for now, he’s capped at a tight ceiling. To kill the pill, Icahn is conducting a parallel proxy fight that would replace the entire Southwest board with 10 new directors: two Icahn insiders and a prestigious group of eight independents.

Icahn said that investors face three choices. First: “Vote for us, and we take over. They drop the pill, and you get the $82.50,” he says. Second: They can vote shares for his directors but keep their stock on prospects that the price will go much higher once the new board and management take the helm and the directors junk the pill. Or third: They can support the current regime. That option’s a disaster, he contends. “If we lose, they’ll go on making bad acquisitions just like in the past. The stock will tank far below our $82.50 offer,” he says. But if his side takes charge, Icahn predicts, the stock’s worth as much as $144.

Icahn circles his target

Icahn’s quest first began in July of 2021, when he started accumulating shares of Southwest Gas. The target fit Icahn’s favorite profile as a vastly undervalued industrial stalwart. Southwest is the largest natural gas provider in Arizona and Nevada, and also covers California’s Lake Tahoe area, serving 2.1 million customers. For a utility, it’s an outlier in also harboring a big nonutility unit, that Centuri construction arm. Over the past five years, Centuri grew rapidly via strong internal expansion and a series of acquisitions, and now accounts for over 50% of revenues. Southwest’s stock thrived from the start of 2016 to early September of 2019, rising 82% and handily beating the S&P utilities index. Then its shares went into sharp decline, falling 22% by early June of 2021, underperforming the industry by over 30%.

By last summer, Southwest was selling at roughly 16 times earnings, a low multiple on depressed profits. Although it dominates two of America’s fastest-growing household and business energy markets in Nevada and Arizona, the utility segment has posted unimpressive growth in earnings. Profits increased just over 4% annually from 2017 to 2021. Several analysts ascribe that halting rise to the extremely the tough regulatory climate in both states. “In states like Arizona and Nevada where the rate base is growing fast, companies have increases in expenses right away, but there’s a long lag before they get permission to raise their charges,” says Chris Ellinghaus of Siebert Williams Shank, an investment banking, trading, and research firm. “And Arizona is especially tough in holding down increases.” Southwest’s star is the infrastructure business. From 2017 to 2021, its earnings rose by 95% or 18% a year. (Centuri earnings declined in 2021 owing to one-time charges tied to its $855 million acquisition of New Jersey–based contractor Riggs Distler, a deal that should substantially raise its profitability in the years ahead.)

Icahn saw the problem, as he later noted in his filings. The markets dislike combining a utility and a construction unit under the same umbrella. The reason: Investors choose utilities because their rates are guaranteed to increase, providing steady, reliable growth in earnings and dividends. But the construction business is a different animal. Icahn views the franchise as a big winner going forward, believing it will ride the wave as U.S. utilities will spend decades upgrading the grid to prepare for the transition to renewable energy and to repair aging natural gas pipeline networks. But utility investors are risk-averse and don’t like the extra uncertainty in owning a utility that’s also in the construction field. Plus, investors tend to pay lower multiples for conglomerates than for pure-play businesses.

Indeed, at the same time Southwest kept diversifying, most utilities were shedding unrelated assets to focus on their core utility franchises. Dominion, CenterPoint, DTE, and ConEd recently sold their midstream pipeline units, and PEG and AEP downsized or are looking to downsize their unregulated renewables. But Southwest kept moving in the opposite direction. What frustrated analysts and investors is that Southwest’s leaders kept talking about the virtues of spinning Centuri into a separate company but didn’t do it. Tim Winter, a portfolio manager at Mario Gabelli’s GAMCO, owner of some $150 million or 3% of Southwest’s shares, suggested that Southwest separate Centuri earlier instead of continuing to build it. “They initially said that when Centuri reached $1 billion in sales it would be large enough to become a separate company,” says Winter. “The problem is that when a construction business gets to a certain size, its risk profile is far different from that of a utility.”

On the conference call last July following the announcement of the Riggs Distler deal, management strongly implied that Southwest was in the construction game to stay. “As it turned out, waiting wasn’t a bad thing, because Centuri was doing so well, but it’s a good thing they finally decided to separate it,” says Winter.

Getting Icahn’s attention

It was Hester’s blueprint for financing Questar that most irked Icahn on that Sunday in October. But Icahn saw that plan as an opening to checkmate his opponent. The presentation for the Questar purchase disclosed that Southwest planned to raise $900 million to $1 billion in equity to finance the deal. In his calls with Hester in the days after Oct. 5, Icahn told the Southwest CEO that it was a terrible idea to sell shares worth $100 or more at the current, greatly depressed price of around $65. “I told him, ‘This is crazy! It’s massively dilutive. How can you tell your shareholders, “Don’t tender your shares to Icahn at $75, because it undervalues the company,” then go and offer a large bloc to your friends in the $60s!’” Icahn told me in our interview.

In a shrewd riposte, Icahn first recommended a $1 billion rights offering to existing stockholders that he would “backstop” by buying any unpurchased shares. That option, he said, would assure that a big bloc didn’t go to a “white squire” investor who would support management in return for getting shares at a deep discount. According to Icahn, Hester simply said that he’d discuss the proposal with his board.

When Icahn became worried that Southwest would indeed seek a “white squire,” he offered to fund the entire $1 billion at $75 a share, a big premium to where the shares were trading. The deal would have been a huge winner for Icahn, giving him an additional 25% of all Southwest stock at a bargain price.

Southwest’s board rejected Icahn’s offer on grounds that it vastly undervalued the company’s shares. Icahn fired back, calling the rationale for selling at $65 when he was offering $75 “crazy.” On Oct. 10, the Southwest board introduced the poison pill limiting Icahn’s holdings to 9.9%. Two weeks later, Icahn counterattacked by starting a tender offer for any and all Southwest shares at $75. But he also needed to capture a majority of the board to junk the pill. Denouncing spoiler as “a management and board job protection plan,” Icahn started a proxy contest to replace all 10 Southwest directors with his own candidates. Still, he had to deal with the heavy regulations that make the hostile takeover of a utility so difficult. He needed approval from state regulators to amass over 24.9% of Southwest’s shares. Icahn proposed an innovative solution: holding any stock over that threshold in a trust where he would exercise no voting rights until he’d secured the go-ahead to take ownership.

Icahn posted the offer on Twitter, under a bio line that appeared to summarize his opinion of Southwest’s strategy to repel him: “Some people get rich studying artificial intelligence. Me, I make money studying natural stupidity.”

Sweetening the deal

By early March, Southwest announced the long-awaited separation of Centuri. Southwest’s stock rose into the low $70s. It was clear that Icahn needed to sweeten his offer to win more shares in the tender. On March 14, he raised his bid to $82.50, and the stock has been climbing ever since. Later in March, Southwest made another move that improved the terms for the Questar financing, also likely the result of Icahn’s pressure tactics. Management pared its equity raise to finance the Questar deal from $900 million to $1 billion to just $400 million––and got the cash by selling shares not at the $65 that prevailed when it announced the deal, but at $74.

Icahn subsequently denounced the new arrangement in an April 4 letter, slamming Southwest for not taking his bid to back the deal at $82.50 and instead issuing shares to outsiders in an effort to increase the odds of winning the proxy battle. “There must be a law somewhere saying that you can’t burn $60 million…simply to make the chance of winning an election higher,” wrote Icahn.

Icahn still believes that if he doesn’t fully take charge, Southwest’s current management will never exploit the full value of its assets, and never get the stock to his target of well over $100. Since Icahn took his campaign public on Oct. 5, Southwest’s shares have jumped 25%, outpacing the S&P 500 Utilities index by 10 points. “Could Southwest have been run more optimally? Perhaps. Icahn was probably a catalyst in getting it to separate the services business,” says Winter of GAMCO. Adds Ellinghaus of Siebert Williams Shank, “The separation was an inevitability, but Icahn probably accelerated the process.”

But Icahn wants a full breakup, so that Southwest sells Questar as well to become a pure-play utility, in his view the model that investors will value most highly. Of course, that can only happen if Icahn wins the proxy war so that the new board scuttles the poison pill. Icahn contends that if his side doesn’t win, Hester will keep doing a poor job running the utility, and probably make more nonutility acquisitions. That combination, Icahn insists, would render the shares worth a lot less than his $82.50 bid.

Southwest will release the proxy results at the annual meeting on May 12. Whether Icahn prevails or loses hinges on such crucial yet unpredictable factors as the recommendations from proxy advisory firms ISS and Glass Lewis, and whether Icahn increases his bid, and if so by how much.

A Southwest source “close to the deal” told me that the company had planned all along to split Centuri after securing the Questar acquisition, and that Icahn’s pressure had nothing to do with that decision. “It would be insane for shareholders to sell at $82.50 when Icahn says shares are worth way over $100,” says the source, who added that any characterization that Hester attempted to place shares with “friendly” investors is “completely inaccurate.” Southwest also provided Fortune with the following statement: “With the spinoff of Centuri, Southwest Gas stockholders will benefit from continued ownership of the Centuri growth story and the significant financing and operating efficiencies available to Southwest Gas as a fully regulated pure play leader…Mr. Icahn’s plan risks denying stockholders [the benefits of] both.”

If Icahn loses the proxy fight, he’ll do fine by bagging several tens of millions in gains. But he could make multiples of that number if he wins. To get there, he’ll probably have to substantially increase his bid. But if he’s right about Southwest’s eventual worth, even a number in the low-$90s would leave plenty of upside. I asked Icahn if he specifically chose Southwest because it’s in the energy business, and foresaw that the field would get incredibly hot. “Naw,” he says. “I think the economy has a lot of problems, and the best way to benefit is to buy undervalued companies.”

Either way, the battle for Southwest reaffirms one truth that has remained a constant for nearly a half a century in corporate America: No CEO wants Carl Icahn to be on the other end of the phone when they’re out to lunch.