AT&T Reacts to Activist Investor: Will Review Assets, Board Changes, CEO to Stay Through at Least 2020

Randall Stephenson - Economic Club Lunch- Getty-H 2019
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The telecom giant also reports its latest financials and operating trends, including more subscriber losses at DirecTV Now and DirecTV.

Telecom giant AT&T on Monday reacted to activist investor Elliott Management with a three-year financial plan and a set of initiatives, saying it would review its asset portfolio, which signaled the potential sale of non-core businesses, engage in "no major" acquisitions and look at changes to its board.

Amid recent talk about potential management changes, the company said chairman and CEO Randall Stephenson would stay in his CEO post through at least 2020. The company will then separate the chairman and CEO roles and evaluate all potential CEO candidates, according to Elliott.

WarnerMedia CEO John Stankey has long been seen as the likely next CEO given his experience and rise at the company and his recent appointment as COO. But Elliott is understood to have pushed for a broader look at various candidates when Stephenson exits the CEO post.

With Stankey recently named president and COO of AT&T, Stephenson on an analyst call said Stankey will continue to lead WarnerMedia as CEO, even after naming former NBC Entertainment chairman Robert Greenblatt and Ann Sarnoff to top posts as he bolsters its leadership team.

In terms of updating its board, which currently has 13 members, AT&T said it plans to appoint two new directors over the next 18 months as two current directors are set to retire. "The company expects to add a new director at its next board meeting, followed by another director in 2020," AT&T said. "In both cases, the board will continue to select directors with skill sets that align with the objectives laid out today."

As far as its business portfolio review goes, AT&T said it would "continue to actively review its portfolio, analyze the merits of each business and monetize non-core assets."

Elliott in a response said it had held conversations with AT&T's management and board about its key concerns and was "supporting the multi-faceted approach to shareholder value creation unveiled by the company today."  

Said Elliott partner Jesse Cohn and associate portfolio manager Marc Steinberg: “We commend AT&T for the positive steps announced today, which will create substantial and enduring shareholder value at one of America’s greatest companies. We have worked closely and collaboratively with management and the board on the initiatives announced today. It is clear to us that AT&T is committed to and accountable for creating shareholder value over the near- and long-term."

They added: “We have closely evaluated the company’s three-year plan and support the steps toward a faster-growing, more profitable, focused and shareholder-friendly company. The combination of AT&T’s improving business performance, consistent and faster revenue growth, significant margin expansion and enhanced capital return will generate meaningful earnings and cash flow growth over the next three years. In addition, AT&T will continue to refresh its board.... Altogether, we are confident this will yield significant share price upside at AT&T."

Stephenson during the analyst call talked about continuing efforts to reduce overall debt, operating costs, whether by selling real estate or non-core assets. He added AT&T was looking for $700 million in synergies by the end of the year. "This is a continuous process for us," Stephenson said. And after Elliott Management put a spotlight on DirecTV, the AT&T boss said the flagging asset was no sacred cow.

"DirectTV has been the subject of a lot of speculation in that regard. As we've said, it will be an important part of our strategy over the next three years. But no portion of our business is exempt... We'll approach it with a fresh set of eyes around the evolving consumer environment," Stephenson said. Wall Street analysts point to the value of DirecTV falling in value to $40 billion after the telecom giant paid $67 billion to acquire it in 2015.

Stephenson also told analysts that after acquiring WarnerMedia AT&T would do no major acquisitions over the next three years, aside from tuck-in deals.

AT&T on Monday also reported its third-quarter financials, disclosing that it lost 195,000 subscribers at its DirecTV Now streaming service in the third quarter after a 168,000 loss in the second quarter, and lost another 1.2 million premium TV subscribers at DirecTV and U-Verse.

The service had lost 83,000 subscribers in the first quarter and 267,000 drop in the fourth quarter of 2018. It ended September with 1.1 million subscribers.

The company also lost 1.16 million traditional pay TV subscribers in the third quarter between its DirecTV satellite TV and U-Verse services after losing 778,000 in the second and 544,000 in the first quarter. 

The pay TV loss was "due to customers rolling off promotional discounts, programmer disputes and competition as well as lower gross adds due to the continued focus on adding higher-value customers," the firm said. The DirecTV Now losses were "due to higher prices and less promotional activity."

WarnerMedia, led by Stankey, continued to face a potential subscriber headwind at HBO amid a continued blackout on pay TV giant Dish Network. Meanwhile, the Warner Bros. film unit's key release in the third quarter was It Chapter Two, while the year-ago period had benefited from Crazy Rich Asians and The Meg.

Overall, the entertainment arm's revenue was down 4.4 percent to $7.85 billion, with operating income of $2.53 billion down 1.5 percent from the year-ago period, "with strength in HBO."

Warner Bros. recorded a quarterly operating profit of $588 million, up 2.1 percent, even though down revenue fell 10.4 percent due to declines in theatrical and television revenue, partially offset by gains in games and other revenue.  

HBO's operating income jumped 13.7 percent to $714 million as revenue rose 10.6 percent, reflecting an increase in content and other revenues and a 1.1 percent increase in subscription revenues despite lower domestic linear subscribers.

Turner operating income rose 2.6 percent to $1.5 billion as operating expenses declined slightly, including content and marketing spending, and revenue climbed slightly "due to a 3.9 percent increase in subscription revenues, partially offset by a 3.3 percent decline in advertising revenues and a 11.6 percent decline in content licensing and other revenues."

AT&T will on Tuesday host its formal coming out for the planned HBO Max streaming service in Burbank where it is expected to share the service's pricing and other details. Stephenson on Monday touted HBO Max as AT&T's main streaming product, alongside its traditional satellite TV offering. And he rejected the notion HBO Max is launching into a cluttered market. "This is not Netflix. This is not Disney. This is HBO Max and it's going to have a very unique position in the marketplace," Stephenson argued.

“This is going to be a meaningful business for us over the next four or five years and we’re talking a 50 million subscriber business and we’re really enthusiastic about this," said Stephenson, clarifying that’s a domestic forecast of 50 million subscribers over five years, in 2025. 

Elliott Management in September disclosed a big stake in AT&T and publicly urged the company to pursue changes to boost its stock performance. Stephenson on Monday welcomed the talks AT&T has been having with Elliott as "constructive, as well as helpful... These are smart people. And they very much understand the tremendous opportunity that we have to create substantial shareholder value."

Elliott in its initial September letter 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 hedge fund's letter outlined a four-part plan — the so-called Activating AT&T Plan — that called for "increased strategic focus," including the possible sale of unnecessary assets; improved operational efficiency; "a formal capital allocation framework"; and "enhanced leadership and oversight."

AT&T's stock was up in premarket trading.

Oct. 28, 6:30 a.m. Updated with comments by AT&T execs made during an analyst call.