AT&T Activist Investor's Demands Divide Wall Street Analysts

Randall Stephenson - Economic Club Lunch- Getty-H 2019
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"The majority of AT&T investors would support" Elliott's demands, says one Wall Street expert as the stock is up 4 percent this week, while another one suggests they could become a "major distraction for management."

AT&T stock has seen much trading activity and movement since Elliott Management early Monday disclosed a $3.2 billion stake in the parent company of WarnerMedia and called for strategic changes and divestments.

But after an early Monday gain of 10 percent-plus, the telecom and entertainment giant's shares were only up 4 percent by the end of trading on Tuesday compared with Friday's closing price as Wall Street analysts appeared split on the activist investor's recommendations and likely impact.

Elliott called for a review of AT&T's assets with the intention of identifying "distractions" that should be sold off, and it was particularly bearish on pay TV giant DirecTV, which the company acquired for $67.1 billion in 2015, which the investor argued was "the absolute peak of the linear TV market."

While Elliott stopped short of demanding specific noncore assets that be sold off beyond DirecTV, it suggested several candidates, including regional sports networks, Central European Media Enterprises, Sky Mexico and other Latin American pay TV operations.

The asset sales are part of Elliott's four-part plan — the so-called Activating AT&T Plan — that, the firm argues, would improve AT&T’s stock price and its business. The plan calls for "increased strategic focus," including the possible sale of unnecessary assets; improved operational efficiency; "a formal capital allocation framework," including an increased dividend and a further reduction of debt; and "enhanced leadership and oversight."

"We think the increased scrutiny is positive," Cowen analyst Colby Synesael said in a research note after Elliott went public Monday with its demands for changes in a letter to AT&T's board of directors. "We believe the majority of AT&T investors would support the things Elliott is asking for."

However, Wells Fargo analyst Jennifer Fritzsche argued that while "this letter shines the light on parts of the AT&T history, which have resulted in the stock's compelling valuation ..., many of the suggestions (beyond management change) we believe AT&T is already pursuing." 

Credit ratings agency Fitch noted that "AT&T's lagging stock price relative to the S&P 500, monetizable assets, and potential restructuring opportunities due to a series of acquisitions may have made it vulnerable to activist investors," even though Elliott's $3.2 billion in stock represents a tiny fraction of AT&T's $267 billion market capitalization.

But Fitch analyst John Culver also warned that Elliott's demands could become a "major distraction for management" even though "we view Elliott's suggestion to divest noncore assets and aggressively de-lever as in line with AT&T's current plan." Explained the analyst: "The activist is proposing AT&T consider divesting larger assets the telecom company views as core, but Elliott sees as having no clear strategic rationale, including DirecTV and the company's Mexican wireless operations."

Culver particularly highlighted potential complications around a potential sale of DirecTV, writing: "AT&T has a strategy in place to help stem subscription losses at DirecTV caused by the secular shift in how consumers watch television, growth of broadband and 5G, and more affordable over-the-top and direct-to-consumer services. Limited success could justify a divestiture, but the pool of available strategic buyers may be narrow due to antitrust issues in the case of Dish Network and a poor or unlikely strategic fit with other telecom providers."

Elliott maintains that with the changes it seeks, AT&T shares should surge to $60-plus by the end of 2021, while the stock closed Tuesday at $37.58. That would be music to the ears of longtime investors who have seen their shares mostly tread water for the past couple of years, despite all the hoopla surrounding its $109 billion (including debt) purchase of Time Warner, now known as WarnerMedia.

Some observers note that while the stock isn't rising, AT&T does pay a steady dividend and is positioned well should the markets turn south or the economy head toward recession.

"There's a subtext to [Elliott's] letter that can't be escaped," wrote MoffettNathanson analyst Craig Moffett in a research note. "AT&T's valuation isn't just an indictment of management. It is also a reassuring cushion. AT&T is cheap. Even if the board doesn't do much — perhaps if it doesn't do anything at all — AT&T's valuation provides a welcome margin of safety."

He also posed the question: "Is AT&T's weak performance a function of poor management of the assets they have assembled, or is it a function of having assembled a poor collection of assets?" The analyst argued that it was the latter — "compounded by having grossly overpaid for them."

Moffett suggested that selling or spinning off assets may not be the answer, given that "DirecTV is a mess" that would not be worth more even if it were merged with its primary competitor Dish. "And while Time Warner still looks OK, does anyone doubt that it faces increasingly serious challenges that would have it trading at a sharp discount to where [AT&T] bought it?"

Cowen, though, concludes that what Elliott is asking for is no different from what many investors have been thinking of for a long time, "but didn't necessarily have the clout or mandate to actively champion."

AT&T and WarnerMedia are relative latecomers to the booming streaming space, and some observers have little faith that they will be able to meaningfully compete against Netflix and the upcoming Disney+ service, set to have a $7 price tag per month, or Apple TV+ at $5 a month.

"The core cable networks at Turner are subject to precisely the same forces that are buffeting the [AT&T] entertainment group," Moffett said. "And it is increasingly clear that their solution, HBO Max, is likely to be priced far above the market, but still no higher than HBO is today ... meaning that the added content from Turner and the Warner Bros. studio will be given away. That, too, will come home to roost in 2020." 

Most on Wall Street are now focusing on AT&T chairman and CEO Randall Stephenson's appearance at the annual Goldman Sachs Communacopia conference in New York next week and especially the company's previously announced analyst day on Oct. 29 in Burbank as the next big events that could yield news and stock reactions. "We expect shares to react positively to this letter and the Oct. 29 [analyst] day to be made even more interesting," said Fritzsche.

In a recent report, she highlighted that AT&T "was clear that the focus of the analyst day will be centered around the WarnerMedia division," making the following predictions: "We would expect to hear color on pricing of HBO Max and other details around this offering (i.e. total addressable market opportunity, expected penetration and impact to licensing revenue). We would not be surprised if AT&T also offered other color on thoughts around some 2020 metrics to help the investment community to bridge how this strategy will impact the forward trends of the overall business."