By Drew FitzGerald
One of Wall Street's most powerful activist investors is
challenging AT&T Inc.'s ambition to build a media conglomerate
and is pushing the company to refocus on its telecommunications
roots.
Hedge fund Elliott Management Corp. disclosed a $3.2 billion
stake in AT&T, criticized its longtime CEO's acquisition
strategy and called on the company to shed some assets. The
investor, which has tangled with Samsung Electronics Co. and the
Argentine government, called on AT&T to name new directors to
its board.
The start of a public battle will test shareholder support for
Chairman and Chief Executive Randall Stephenson's plans to remake
AT&T into a media and advertising powerhouse. He has used big
takeovers to add properties such as HBO, Warner Bros. and DirecTV,
and is seeking to compete with Comcast Corp. as well as Netflix
Inc. in the battle for consumers' attention.
Elliott began laying the groundwork for its campaign last year
when AT&T's shares sagged in the wake of its Time Warner
acquisition, though the firm decided to go public after AT&T
promoted one of Mr. Stephenson's lieutenants to be his likely
successor, according to a person familiar with the matter.
AT&T last week elevated John Stankey, a longtime executive
who advocated for both the DirecTV and Time Warner deals, to be its
president and chief operating officer. He was promoted after
telecom chief John Donovan, who oversaw more than 80% of the parent
company's revenue, announced his retirement after losing a
succession race.
Elliott questioned the executive change and asked whether
AT&T conducted an external review for the new No. 2
position.
AT&T wasn't given much advance notice of Elliott's plan, and
Mr. Stephenson had yet to meet with its portfolio managers early
Monday, according to people familiar with the matter.
AT&T has a history of making big acquisitions and of
choosing its top managers from within. Elliott criticized both
practices in a letter to the company released Monday.
Elliott didn't ask AT&T to sell specific divisions but said
the company should review any assets that lack a strategic
rationale, including the DirecTV satellite service and Mexican
wireless operations.
With a market value of more than $260 billion, the Dallas
company is among the hedge fund's biggest corporate targets to
date. With a roughly 1% stake, Elliott will probably need support
from other institutional investors to pressure the company.
AT&T shares rose 2.7% to $37.22 in Monday afternoon
trading.
Elliott assailed AT&T management for its nearly $50 billion
purchase of DirecTV in 2015 and said it remains cautious about last
year's roughly $80 billion purchase of Time Warner. DirecTV has
been losing millions of customers as cord-cutting saps the pay-TV
market. AT&T has replaced most of the leadership at Time Warner
as it prepares to launch a new streaming service.
"AT&T has been an outlier in terms of its M&A strategy,"
Elliott wrote. "Most companies today no longer seek to assemble
conglomerates."
AT&T is the No. 2 U.S. cellphone carrier by subscribers,
trailing rival Verizon Communications Inc., and the top provider of
pay-TV channels just ahead of Comcast.
AT&T said it regularly speaks with shareholders about
business strategy and said it would engage with the hedge fund.
"Indeed, many of the actions outlined are ones we are already
executing today," the company said in a statement. AT&T said
its "strategy is driven by the unique portfolio of valuable
businesses we've assembled across communications networks and media
and entertainment."
Mr. Stephenson, a telecom veteran who has been CEO for more than
a dozen years, has reshaped the telephone company in recent years,
making it one of the biggest U.S. media players. The deals left the
company with more than $170 billion in net debt at the end of
2018.
President Trump, a frequent critic of CNN, weighed in on the
news, tweeting: "Great news that an activist investor is now
involved with AT&T." As a presidential candidate in 2016, Mr.
Trump vowed to block AT&T's takeover of Time Warner. The U.S.
Justice Department in 2017 sued to stop the merger, but AT&T
prevailed in court after months of costly litigation.
Elliott, founded by billionaire Paul Singer, is one of the
biggest activist investors. Last year, the hedge fund launched the
equivalent of nearly one new public activism campaign every two
weeks, pushing for change at companies around the world including
Sempra Energy, Nielsen Holdings PLC and Pernod Ricard SA.
In its AT&T letter, Elliott argues the company has
underperformed the market for the past decade and puts much of the
blame on Mr. Stephenson's acquisition strategy.
"AT&T has transformed itself into a sprawling collection of
businesses battling well-funded competitors, in new markets, with
different regulations, and saddled with the financial repercussions
of its choices, " the fund said.
In addition to asset sales, Elliott called on AT&T to boost
its profit margins by cutting at least $5 billion in costs,
including outsourcing some functions, consolidating offices and its
retail footprint.
The hedge fund predicted that if AT&T pursues the strategic
and operational improvements Elliott suggests, the shares could be
worth more than $60 a share by the end of 2021.
AT&T shares closed Friday at $36.25 and have rallied in
recent months after starting the year around $30.
Entering the week, AT&T has posted a total shareholder
return -- or stock-price changes plus dividends -- of more than 20%
over the past year, compared with 5.8% for the S&P 500 and 14%
for Verizon.
Over the past five years, AT&T has posted a total
shareholder return of 6.6%, compared with 10.7% for the S&P 500
and 8.8% for Verizon.
Shares hit a multiyear low of $27.36 in December as investors
questioned whether its heavy debt load was sustainable. The company
has spent the past year shoring up its balance sheet, partly
through sales of assets.
Corrie Driebusch contributed to this article.
Write to Drew FitzGerald at andrew.fitzgerald@wsj.com
(END) Dow Jones Newswires
September 09, 2019 15:27 ET (19:27 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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