Activist investor Elliott Management has taken a $3.2bn stake in AT&T, one of its largest-ever positions, and is pushing for a strategic overhaul at the US telecoms group, which it says has been a “disappointing investment for shareholders”.
Paul Singer’s $38bn hedge fund has taken aim at AT&T’s merger strategy, including its $80bn takeover of Time Warner, saying the US telecoms group has embarked on a “questionable” acquisition strategy.
“What has attracted our attention, as well as the attention of other shareholders . . . has been the prolonged and substantial underperformance of AT&T as an investment relative to its potential,” Elliott partner Jesse Cohn and associate portfolio manager Marc Steinberg said in a letter on Monday to AT&T’s board.
Over the past decade, the company “has not only failed to keep pace with the broader market, but has actually underperformed by over 150 percentage points”, they added.
The size of the AT&T stake is one of the biggest ever taken by Elliott or any activist hedge fund. Elliott, one of the most formidable and prolific activist investors, has grown larger than any of its rivals, allowing it to build a war chest to take on companies the size of AT&T, which has a $275bn market capitalisation.
The move caught the attention of US President Donald Trump, who weighed in with a message on Twitter attacking the TV network CNN.
“Great news that an activist investor is now involved with AT&T,” he tweeted. “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.”
Elliott, however, said it sees an “irreproducible collection of leading businesses” at AT&T, including its wireless business and its media franchise.
The fund managers praised the company’s “rich and pioneering history” and its “hard work, ingenuity and passion of its dedicated employees”. The fund asked for a meeting with the company and was seeking to work with them, it said.
In the letter, Elliott outlined a four-part plan to tackle what it described as the company’s long-term underperformance by increasing strategic focus to win back market share of wireless revenues, improving operational efficiencies and cost-cutting and enhancing the company’s leadership by stemming the tide of executive departures.
After buying Time Warner, AT&T appointed John Stankey, a company veteran, to run its entertainment business. Mr Stankey has overseen a tumultuous management shake-up as three of the four leaders of Time Warner have left — an exodus that Elliott described as “alarming”.
HBO chief Richard Plepler quit after determining he would not be given the same level of independence in the new regime, while Turner head David Levy also left. Mr Stankey initially promoted Kevin Tsujihara, the chief of the Warner Bros film studio, only to see him abruptly resign two weeks later in light of misconduct allegations. Mr Plepler’s exit in particular raised alarm bells with analysts, because he had been credited with leading HBO’s successes through the past decade.
“For a content business now owned by a telecommunications company and under the direct supervision of a life-long telecom executive, this lack of continuity in leadership presents a real concern,” Elliott said on Monday.
The deals over the past nine years had been particularly damaging for AT&T, the fund said, as the company became “saddled with the financial repercussions of its choices”.
The fund said it was “cautious on the benefits” of the telecom giant’s acquisition of Time Warner and said “we should be seeing some manifestations of the clear strategic benefits by now”.
More damaging, the Elliott managers said, was the failed $39bn acquisition of T-Mobile in 2011, which resulted in the largest break-up fee ever paid, and the 2014 takeover of DirecTV for $67bn, which it said was acquired at the peak of the pay-TV market.
Elliott also hit out at AT&T’s strategy to rival Netflix with its own streaming service, stating that there is a “growing sense that AT&T doesn’t have a plan”. AT&T, like other media giants such as Disney, Comcast and Apple, is plotting a direct-to-consumer streaming service. The company in July said it would name the service HBO Max and launch in the spring of 2020 — lagging behind the debuts of Disney and Apple in November.
AT&T said it would review Elliott’s letter and “look forward to engaging with Elliott”.
“Indeed, many of the actions outlined are ones we are already executing today,” the company said. AT&T’s 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.”
Elliott says its plan will see AT&T’s share price go above $60 by the end of 2021. AT&T shares were up about 4.5 per cent at $37.88 after the announcement.