By Drew FitzGerald, Shalini Ramachandran and Corrie Driebusch
Randall Stephenson, AT&T Inc.'s longtime boss, got an
unexpected phone call Sunday evening from a hedge-fund manager at
Elliott Management Corp., one of Wall Street's biggest and most
aggressive activist investors.
The call was brief and cordial, but behind it was a stinging
rebuke of the telecom veteran's mission to turn the phone company
into a media giant and leave a top lieutenant to finish the job.
Investor Jesse Cohn told Mr. Stephenson the hedge fund had concerns
about AT&T's strategy and execution, reflecting worries
percolating around the company, said people familiar with the
matter. Mr. Stephenson alerted his lead director.
The next day, Elliott Management issued a 23-page report that
publicly questioned the logic of AT&T's $49 billion takeover of
DirecTV in 2015, shortly before cord-cutting accelerated, and its
$81 billion deal last year to buy Time Warner, home of HBO and
Warner Bros, only to replace almost all of its experienced
entertainment bosses.
Elliott's report Monday also questioned whether Mr. Stephenson's
presumed successor could successfully integrate the conglomerate
into a force able to compete for advertising dollars against the
likes of Google and win a costly battle for streaming supremacy
with rivals like Netflix Inc. and Walt Disney Co.
Plans for Mr. Stephenson's triumphant exit, as early as next
year, now threaten to turn into a monthslong fight over the
direction of the $280 billion telecom company and a test of the
board's loyalty to his long-term vision.
The challenge issued by Elliott pits the 59-year-old AT&T
chief executive against a 39-year-old Wall Street manager known for
pressuring his targets to shake up their operations.
Mr. Stephenson has spent most of his dozen years as chairman and
CEO piecing together a modern media company that will be his
legacy. The three-decade company veteran -- who said HBO's
"Succession" was one of his favorite TV shows -- has signaled
interest in stepping down as soon as next year, people familiar
with his thinking said.
Mr. Cohn is seeking sweeping changes despite Elliott owning a
$3.2 billion, or roughly 1%, stake in AT&T shares and options.
Other activists have used similar stakes to shake up corporations
as big as Procter & Gamble Co. and General Electric Co., often
taking seats on the board.
Mr. Cohn, a partner who runs U.S. equity activism at Elliott,
has told other investors that he wants AT&T to explore the sale
of DirecTV and other assets, as well as have a say in picking its
next leader. Elliott must decide by the end of January whether to
initiate a proxy fight, but Mr. Cohn told Mr. Stephenson that he
wanted to work together.
AT&T said it looked forward to engaging with Elliott, and
that it was already pursuing some actions laid out in Elliott's
report: "AT&T's Board and management team firmly believe that
the focused and successful execution of our strategy is the best
path forward."
Mr. Stephenson, who declined to comment, has defended his
strategy, saying AT&T is boosting its programming investments,
helping HBO compete with growing numbers of streaming services and
harnessing data from its phone and TV customers to compete with the
biggest ad platforms. He has said AT&T's subscriber pool offers
its media units a broad distribution system.
"The business model does have to change," he said after winning
an antitrust case last fall to buy Time Warner. He will get a
chance to make his case to investors Tuesday when he takes the
stage at a Goldman Sachs conference in New York.
Despite the high-profile acquisitions, AT&T shares have been
flat since Mr. Stephenson took over. They hit a multiyear low near
$27 in December as investors worried about the more than $160
billion in debt the company had accumulated from its acquisitions.
The shares had gained 33% this year before Elliott released its
letter.
Sam Hendel, president of Levin Easterly Partners, which owns
roughly 3.5 million shares of AT&T, said he sees potential,
particularly in wireless as 5G networks expand. Time Warner is a
great asset, he said, but he agreed with Elliott that AT&T has
to add experience in media to the board and senior management.
Elliott, which is run by billionaire Paul Singer and manages
about $38 billion, is known for its 15-year crusade to get
Argentina to make payments on defaulted bonds and for battles with
chief executives, including at Arconic Inc.
The Communications Workers of America, a union that represents
about 100,000 AT&T employees, said Elliott's push would cut its
workforce. "Anyone who thinks that Paul Singer and Elliott
Management intend to 'deliver far-reaching benefits' to AT&T's
customers is not familiar with the destruction this vulture hedge
fund leaves in its wake," CWA President Chris Shelton said.
Conglomerates have fallen out of favor on Wall Street, where
many investors now prefer nimble, focused companies. Investors this
year have valued AT&T, which has about 30% more revenue, a top
Hollywood studio and popular cable channels, slightly more than
Verizon Communications Inc., which has largely stuck to the
wireless business. These days, AT&T looks more like Comcast
Corp., a cable operator that owns NBCUniversal and Sky.
"When I was there, it was focused on becoming the biggest and
best telecommunications company in the world and we sort of stuck
to what we knew," said Edward Whitacre, who as chief executive from
1990 to 2007 rebuilt AT&T into a nationwide giant by snapping
up regional Baby Bells. "But time has moved on and maybe they made
the decisions that they had to make."
Next in line
Last month, one of AT&T's top executives, John Donovan,
announced his plan to retire after finding out he wasn't getting
the top job. Soon after, AT&T's board met to approve the
promotion of John Stankey, one of Mr. Stephenson's longtime allies,
to a newly created role of president and operating chief, making
him the heir apparent.
Mr. Stankey, 56, joined one of the Baby Bells in 1985 and rose
through the ranks. He and Mr. Stephenson share a friendship built
through more than two decades as the regional phone company grew
into the second-largest wireless carrier in the U.S.
Mr. Stankey backed the DirecTV deal and inherited the top post
there and at Time Warner, where he took the helm last year. The
move pushed aside veteran executives in each company. He has
clashed with those below him, according to former executives, and
seen by some as imperious. HBO boss Richard Plepler and Turner
chief David Levy left.
The board voted unanimously to approve Mr. Stankey's promotion,
spurring Elliott to go public with its stake, according to people
familiar with the matter. The hedge fund had been studying AT&T
since the Time Warner deal. It viewed the promotion of Mr. Stankey
to oversee both media and companywide operations as hasty, the
people said.
"I'm a Stankey fan," said Mr. Whitacre, the former AT&T CEO,
who described him as a smart strategic thinker.
AT&T will resist any attempt to dictate its executive suite,
according to people close to the company. Board members see room to
improve AT&T's performance but support Mr. Stephenson's
strategy and praise Mr. Stankey's leadership, according to a person
familiar with the board's thinking.
"There aren't many people from the outside who would be obvious
candidates to run a complicated media and communications business,"
the person said. "A lot of people who run media companies don't
know anything about operating a telecom business."
That raises the prospect of a protracted, monthslong battle
between the corporate behemoth and the hedge fund.
AT&T is working with Goldman Sachs bankers, among others, to
mount a defense against a potential proxy fight.
"I don't think there's going to be much management change until
there's blood in the street," said an investor familiar with
AT&T's leadership.
Serial drama
When Mr. Stephenson took the reins of AT&T in 2007, there
were no more Baby Bells to adopt. Regulators thwarted a 2011
attempt to buy wireless rival T-Mobile USA Inc. In search of growth
and cash flow to sustain AT&T's needs, including what is now a
nearly $15 billion annual dividend, Mr. Stephenson looked to
entertainment.
He closed the purchase of DirecTV in 2015, which turned out to
be near the peak of the pay-TV market. There was internal
disagreement over prospects of the newly enlarged business, which
had amassed 26 million U.S. subscribers. A board-level presentation
in early 2014 warned that the number of pay-TV households were
"likely at their peak and expected to decline."
AT&T's overall TV business has shrunk, and losses have
accelerated. Analysts expect AT&T to end the year with fewer
than 22 million paying TV customers in the U.S.
Elliott is seeking shareholder support to press AT&T to sell
the DirecTV business, according to people familiar with the matter.
Industry M&A experts said it would likely be valued at less
than $25 billion, excluding debt, about half of what AT&T
paid.
If it were put up for sale, there would be few interested
buyers. AT&T finance chief John Stephens said Wednesday that a
hookup between DirecTV and satellite rival Dish Network Corp. has
been tried already. "From a regulatory perspective," he said, "it
hasn't been successful."
Former executives say Messrs. Stephenson and Stankey also
misjudged the demands of running a media business compared with a
telecom business.
The culture clash has been especially stark at Time Warner,
where employees were used to calling their former CEO Jeffrey
Bewkes by his first name.
AT&T has tried to impose a telephone-company culture on a
creative company, a former Time Warner executive said.
A WarnerMedia spokesman said top executives who left the company
all departed for different reasons, and he cited a deep pool of
writers, directors and other creative talent working for the media
unit.
Mr. Stankey, along with his promotion to chief operating
officer, remains CEO of WarnerMedia. He replaced the leaders of
HBO, Turner and Warner Bros., seeking to break down fiefs and
develop a single strategy. He brought in former NBC programming
executive Robert Greenblatt and reduced a 600-person Time Warner
corporate office to fewer than 100.
Elliott criticized AT&T for pushing out much of the
leadership at DirecTV and Time Warner, a sentiment shared by some
current and former executives. AT&T stalwarts disagree, saying
key people continue to work at both units.
This week, Mr. Stankey secured a content partnership with
Hollywood director and producer J.J. Abrams, who signed with
WarnerMedia over other suitors including Apple, a person familiar
with the deal said.
Mr. Stankey's biggest initiative, a streaming service that can
compete with Netflix, as well as new offerings from Apple Inc. and
Disney, has yet to launch.
Soon after the Time Warner deal closed, Mr. Stankey detailed
plans for a three-tiered streaming service with graduated pricing
and varied content. He sought little input from top executives at
Warner Bros. and HBO, blind-siding them with the announcement,
people familiar with the process said.
By June, Mr. Stankey had to backtrack.The three-tier plan was
confusing both to the industry and inside the company, and rivals
were coming out with simple, single-priced offers. AT&T now
plans one service, called HBO Max, which will include HBO shows and
other Warner content, including "Friends." It is expected to cost
more than $15 a month, according to people familiar with the
project.
Inside the company, some executives have been confused by the
shifting strategy on streaming. Strategy sessions for HBO Max in
June were supposed to clarify the company's approach. Yet many who
attended left with many questions unanswered on topics that spanned
pricing to programming, according to a person familiar with the
matter.
--Lillian Rizzo and Joe Flint contributed to this article.
Write to Drew FitzGerald at andrew.fitzgerald@wsj.com, Shalini
Ramachandran at shalini.ramachandran@wsj.com and Corrie Driebusch
at corrie.driebusch@wsj.com
(END) Dow Jones Newswires
September 13, 2019 18:58 ET (22:58 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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