Communications Sector

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>>> AT&T Hits Highest Level Since 2018 After Elliott Urges Shake-Up


By Scott Deveau

September 9, 2019


https://www.bloomberg.com/news/articles/2019-09-09/elliott-takes-3-2-billion-stake-in-at-t-seeks-asset-sales?srnd=premium


Hedge fund criticizes DirecTV, Time Warner, T-Mobile deals

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Unmute

Elliott Management takes a $3.2 billion stake in AT&T.


AT&T Inc.’s sweeping transformation from Ma Bell to a multimedia titan has gone both too far and not far enough for Elliott Management Corp.

Billionaire Paul Singer’s New York hedge fund disclosed a new $3.2 billion position in AT&T, taking on one of the nation’s biggest and most widely held companies with a plan to boost its share price by more than 50% through asset sales and cost cutting.

Elliott outlined a four-part plan for the company in a letter to its board Monday. The proposal calls for the company to explore divesting assets, including satellite-TV provider DirecTV, the Mexican wireless operations, pieces of the landline business, and others. It urges AT&T, led by Chief Executive Officer Randall Stephenson, to exit businesses that don’t fit its strategy, run a more efficient operation and stop making major acquisitions. Elliott said it would also recommend candidates to add to AT&T’s board.

In response, AT&T said it would review Elliott’s recommendations and said many of them are “ones we are already executing today.”

The telecom giant said its strategy is “driven by the unique portfolio of valuable businesses we’ve assembled across communications networks and media and entertainment, and as Elliott points out, is the foundation for significant value creation. We believe growing and investing in these businesses is the best path forward for our company and our shareholders.”

AT&T shares surged as much as 5.2% to $38.14 in New York trading Monday, reaching their highest level since February 2018.

Elliott said the investment -- among its largest to date -- was made because the company is deeply undervalued after a period of “prolonged and substantial underperformance.” It argued this has been marked by its shares lagging the broader S&P 500 over the past decade. It pointed to a series of strategic setbacks, including $200 billion in acquisitions, the “most damaging” of which was its $39 billion attempted purchase of T-Mobile US Inc. That deal resulted in the largest breakup fee of all time when the government blocked it in 2011 -- about $6 billion in cash and assets.

“In addition to the internal and external distractions it caused itself, AT&T’s failed takeover capitalized a viable competitor for years to come,” Elliott said.

Elliott's pressure for changes boosts AT&T shares
The hedge fund also criticized the subsequent acquisitions of DirecTV and media giant Time Warner Inc.

While the position in AT&T is large, Elliott may have a difficult time pushing for change unless it gets other investors to back its stance. Its newly disclosed stake in AT&T represents just about 1.2% of the company’s total market value.

Elliott’s plan also calls for aggressive cost-cutting measures that aim to improve AT&T’s margins by 3 percentage points by 2022. Those margins have come under pressure amid cord-cutting in video and widespread discounting in wireless, and Elliott said competitors like Verizon Communications Inc. have done a better job addressing those headwinds.

Elliott said in the letter it has identified opportunities for savings in excess of $10 billion, but the plan would only require cost cuts of $5 billion.

Elliott is also calling for a series of governance changes, including separating the roles of CEO and chairman -- currently held by Stephenson -- and the formation of a strategic review committee to identify the opportunities at hand.

Transformative Deals

With a series of deals over the past several years, AT&T has transformed itself from a traditional telecom company into a multimedia behemoth. The company bought satellite-TV provider DirecTV for $67 billion in 2015, leaping into first place among U.S. pay-TV companies. Elliott criticized that deal in its letter as having come “at the absolute peak of the linear TV market.”

AT&T then moved firmly into entertainment and media with the $85 billion acquisition of Time Warner in 2018. That deal brought marquee assets such as HBO, CNN and Warner Bros.

“Despite nearly 600 days passing between signing and closing (and more than a year passing since), AT&T has yet to articulate a clear strategic rationale for why AT&T needs to own Time Warner,” said Jesse Cohn, a partner at Elliott, and Marc Steinberg, an associate portfolio manager, in the letter. “While it is too soon to tell whether AT&T can create value with Time Warner, we remain cautious on the benefits of this combination.”

High Debt

AT&T is the most indebted company in the world -- not counting financial firms and government-backed entities -- with $194 billion in total debt as of June, a legacy of Stephenson’s steady clip of large acquisitions. The CEO used to keep a spreadsheet of a few dozen companies that he studies on his tablet to plan his next big deal, people familiar with the matter told Bloomberg in 2016.

The stock is among the top 20 most widely held U.S.-traded companies among institutional investors, according to data compiled by Bloomberg. That’s partially because of its steady dividend, which totaled $2.04 a share last year, giving investors a reliable payout in good times and bad.

What Bloomberg Intelligence Says

“AT&T will likely be under greater pressure to streamline operations and wring better performance out of Time Warner following the involvement of activist investor Elliott Management, yet this probably won’t prompt a change in company strategy. ... Elliott’s recommendation to spin off the DirecTV satellite business isn’t practical, in our view, as AT&T likely needs its free cash to help fund its dividend.”

-- John Butler, senior telecom analyst, and Boyoung Kim, associate analyst.

Phone companies have also traditionally been considered a safety net for investors in bad economic times because people still need to communicate, though AT&T’s exposure to the landline business has more recently been a drag on profits because more people are shutting off their home phones and going wireless-only.

President Donald Trump, whose Justice Department unsuccessfully opposed AT&T’s Time Warner acquisition and who has criticized CNN’s coverage of him, tweeted Monday, “Great news that an activist investor is now involved with AT&T.”

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