AT&T Stock Jumps as Activist Investor Calls for Changes, Raises Questions About Time Warner Deal Benefits

Randall Stephenson - Economic Club Lunch- Getty-H 2019
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Elliott Management says four strategies can help push the stock higher, and argues the takeover of DirecTV has had "damaging results" as it came "at the absolute peak of the linear TV market."

Investment firm Elliott Management Corp. said Monday that funds that it manages have acquired $3.2 billion of AT&T stock and called for changes at the telecom and entertainment giant, arguing that its acquisition strategy in particular has hurt the company's shares and performance.

Elliott in particular criticized the company's acquisition of satellite TV giant DirecTV, given the challenges the pay TV market has seen since and raised questions about the strategic benefits of the takeover of Time Warner. "AT&T should now place its greatest emphasis on operations — it must move past the era of asset accumulation and into one of integration and execution," its letter argued. 

AT&T shares jumped more than 10 percent in pre-market trading Monday.

Elliott Management released a letter before the market open that said its investment in AT&T was "among its largest ever" and outlined what it called "a compelling value-creation opportunity at AT&T," led by chairman and CEO Randall Stephenson. The letter, addressed to the company’s board, argued that changes could lead AT&T's stock to reach a value of $60-plus by the end of 2021, representing 65 percent-plus upside.

The firm's letter outlined a four-part plan — the so-called Activating AT&T Plan — that, it 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"; and "enhanced leadership and oversight."

Rather than threatening hostile action, the letter also called for "constructive engagement on a mutually agreed-upon plan to realize this unique opportunity for all AT&T stakeholders." After all, Elliott said that AT&T "exhibits a unique combination of historical underperformance, a depressed valuation, well positioned assets and a clear path forward to generate extraordinary value for shareholders and other stakeholders."

AT&T's recent acquisitions strategy was a key focus of the letter. Over the past decade, "AT&T’s shareholder returns have underperformed the S&P 500 by well over 100 percentage points," the activist investor noted, highlighting: "This share-price underperformance has occurred as AT&T’s M&A strategy has taken it into multiple new markets over a series of deals totaling nearly $200 billion, and as its operational performance has measurably declined. As a result, AT&T today is deeply undervalued, trading at just over half the multiple of the S&P 500 — by far its biggest discount yet."

Elliott concluded: "We firmly believe that AT&T’s M&A strategy has not only contributed directly to its profound share price underperformance, but has also caused distractions that have contributed to the company’s recent operational underperformance."

The activist investor's letter also highlighted that "AT&T has been an outlier in terms of its M&A strategy," saying: "Most companies today no longer seek to assemble conglomerates." It noted that AT&T’s focus on acquisitions has been the opposite of that of Time Warner under former CEO Jeff Bewkes, who sharpened the entertainment company's focus by selling assets.

Elliott on Monday lauded the Time Warner assets, but also raised some questions about the strategic benefits AT&T can get from the $85 billion, or $109 billion including debt, takeover that it announced in 2016 and completed in 2018. "Time Warner is a spectacular company, representing a collection of some of the world’s premier media assets, and it remains a strong and valuable franchise today," it wrote in its letter. "However, 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. 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. We think that, after $109 billion and three years, we should be seeing some manifestations of the clear strategic benefits by now."

The firm also quoted former Time Warner boss Bewkes, who has often wondered out loud about all the synergies mega-deals in the sector often promise. "We aren’t alone in our cautious outlook — Jeff Bewkes, the CEO who sold Time Warner to AT&T, recently referred to the vertical integration of content and distribution as a 'fairly suspect premise,'" Elliott's letter noted.

While it called the Time Warner deal one whose benefits must still be proven, Elliott criticized A&T's $49 billion, or $67.1 billion including debt, takeover of satellite TV giant DirecTV in 2015, arguing it has had "damaging results." Said the activist investor: "The pay TV ecosystem has been under immense pressure since the deal closed. In fact, trends are continuing to erode, with AT&T’s premium TV subscribers in rapid decline as the industry, particularly satellite, struggles mightily. Unfortunately, it has become clear that AT&T acquired DirecTV at the absolute peak of the linear TV market."

Elliott shared some detail on its four-pronged strategy. In terms of its point 1, increased strategic focus, it wrote in its letter: "The first step in the plan is a full review of AT&T’s portfolio, including an analysis of which businesses AT&T must prioritize today and which businesses are distractions and should not be part of the portfolio. The review should include a full analysis of the company’s myriad distribution and content assets — wireless, wireline, satellite, film, TV, advertising and others — so that AT&T can implement (and articulate) a cogent and focused business strategy." As part of this, the investor also called for a "strategic shift away from acquisition and toward execution."

What businesses could AT&T sell? "We do not want to preordain the results of this review, but it is clear that AT&T has numerous valuable-yet-non-core franchises that would be potential candidates for divestment, either as assets sold for cash or spun-off alone or in combination," said Elliott. "These include the well-known examples of its home security business, regional sports networks, Central European Media Enterprises, Sky Mexico, Latin American pay TV business (Vrio), Puerto Rican operations and many, many more." 

About its suggested second key strategy, operational improvements, Elliott wrote: "AT&T should immediately initiate a review of its operations aided by third-party advisors. The review should evaluate all functional areas and business units of AT&T’s operations and organizational structure, with a focus on eliminating inefficiency and creating a faster-moving organization." 

Elliott's letter also expanded on the third point in its suggested AT&T strategy. "A formalized capital allocation framework — in which AT&T makes firm commitments regarding how it will, and how it will not, allocate capital — is an essential part of the plan," it said.

The activist investor's fourth and final strategy is about leadership and oversight. "Does AT&T have the right mix of leadership at the company?" Elliott outlined the key question in this regard in its letter. "AT&T’s board is comprised of capable executives, investors and professionals, and we are looking forward to a productive dialogue together. As part of this dialogue, we think it may be beneficial to evaluate the addition of qualified directors with specific domain expertise and operating skills suited for AT&T’s challenges today," Elliott wrote in its letter. "In addition to any potential board enhancement, AT&T must adopt corporate governance best practices relating to board oversight and management." The firm also suggested the formation of a Strategy and Operations Committee of the board.

AT&T in a first response to the Elliott letter said: "Our management team and board of directors maintain a regular and open dialogue with shareholders and will review Elliott Management’s perspectives in the context of the company’s business strategy. We look forward to engaging with Elliott. Indeed, many of the actions outlined are ones we are already executing today."
It added: "AT&T’s board and management team firmly believe that the focused and successful execution of our strategy is the best path forward to create long-term value for shareholders. This 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."

U.S. President Donald Trump tweeted about the news of the letter. "Great news that an activist investor is now involved with AT&T. As the owner of VERY LOW RATINGS @CNN, perhaps they will now put a stop to all of the Fake News emanating from its non-credible 'anchors.' Also, I hear that, because of its bad ratings, it is losing a fortune...," he said. 

In a follow-up tweet, he wrote: "....But most importantly, @CNN is bad for the USA. Their International Division spews bad information & Fake News all over the globe. This is why foreign leaders are always asking me, 'Why does the Media hate the U.S. sooo much?' It is a fraudulent shame, & all comes from the top!"

CNN Worldwide spokesman Matt Dornic responded via tweet, saying: "In case you hear differently, CNN is having its most profitable year in history. Last month the network delivered its highest August ratings on record and won the prime time demo — beating both Fox and MSNBC."