AT&T in talks to appease Elliott: sources

Reports have emerged to suggest the AT&T management team is attempting to reduce pressure from activist investor Elliott Management.

According to Reuters, AT&T has engaged the vulture fund to understand how demands can be met without causing too much disruption to the business or undermining the long-term ambitions of the business.

Elliott Management is pressing AT&T to cut costs, make changes in the management offices and scale back the wider ambitions of the business. One element to the call-to-action from Elliott Management has been to divest non-core assets.

Aside from saving their own jobs, the management team will want to appease the aggression of the vulture fund. With the acquisitions of both DirecTV and Time Warner, the ambition is to diversify revenues, capturing the excitement being generated in the content world. That said, should Elliott Management get its way the AT&T business would be much more commoditised focused almost exclusively on connectivity.

The AT&T business is an interesting one which has polarised opinion. It perhaps has been too cavalier with the cheque book, but few will dismiss the ambition to chase after new revenues. Every forward-looking telco recognises the threat of ignoring diversification and the slow trudge towards commoditisation, though this does not concern Elliott Management.

For Elliott Management, the objective is simple; increase dividend payments and raise share price. Once these two objectives have been met, the team will sell off its stake and collect the profits. This is a mid-term strategy, and it is effective for money men, but it does present a danger to the long-term positioning of AT&T as an influential player in the digital society.

Elliott Management can cause waves, though the ability of the management to control this disruption will give some sort of indication of what AT&T will look like in the future.

Elliott starts calling for AT&T CEOs head – report

Elliott Management, the activist investor which steamrolled into the AT&T business, has called for the replacement of CEO Randall Stephenson.

Stephenson, who has been running the telco since 2007, will hopefully have seen this move coming. The vulture fund has somewhat of an action-plan template when attempting to cause chaos, and a complete restructure of the management team is a tried and testing phase of the battleplan.

According to Fox News, Elliott Management is not only calling for the resignation of Stephenson, it is requesting it be made responsible for sourcing his replacement and demanding representatives on the Board of Directors.

After announcing it had snapped up a $3.2 billion stake in the telco, Elliott Management set to work. As with other companies the vulture fund has invested in, the objective is disruption, slimming back the focus of the business to realise value for the shareholder. This value will take the form of increased dividends and a bump in share price.

The first phase of the Elliott Management plan has already been set into play. Uncertainty has been placed in the mind of investors with the suggestion of a new strategy for AT&T. Elliott did the same at Telecom Italia when it bought its way into the debate. At AT&T, this is a divestment in the media business and a refocus on more traditional telco business activities.

The second and third phases of the disruptive battleplan are plain for everyone to see here. Elliott Management wants to appoint friendlies on the Board of Directors, and it wants to reform the executive team. Both of these phases of the plan will put the right people in the right place to act as internal champions of the Elliott Management approach to telecommunications.

The strategy being proposed is a very simple one, though it will fundamentally alter the direction of the AT&T business. Through the acquisition of both DirecTV and Time Warner, AT&T was looking like a digital services giant with connectivity at the route of the various different products. Elliott Management wants to get rid of these added value components.

Let’s not underestimate or underappreciate how much of a drastic change to the AT&T business this is.

How this saga will evolve remains to be seen. Perhaps the content businesses will be spun-off. One insider is suggesting a JV with a private equity partner and Dish. Some might assume this would be a complete divestment. Maybe a spin-off and an IPO is on the cards to recover funds and reduce AT&T debt?

There are a lot of options, but AT&T will fundamentally be a different business. It will be one which is focused on the commoditised business of connectivity. However, if Elliott Management want to succeed in their ambition, they will need some internal friendlies at the telco. For Stephenson and other executives, this might well mean a new job.

AT&T reportedly considering TV U-turn

A report is suggesting AT&T is mulling over the prospect of selling its DirecTV assets as pressure mounts on the management team.

With the Elliott Management vultures circling overhead and an investor lawsuit hitting the New York District Court, AT&T is reportedly considering its options. Wall Street Journal sources are suggesting a divestment could be on the cards, a humbling move for AT&T executives who are seeing their diversification strategy crumble before their very eyes.

Although the sale of DirecTV is still a slim possibility, some executives might believe this is the best way in which to save their jobs. To demonstrate the scale of this potential outcome, cast your mind back to May 2018, a critical point during the AT&T defence of its Time Warner acquisition.

While the Department of Justice was looking for means to block the acquisition, for a brief moment, a concession was offered to the team; divest DirecTV assets and we’ll OK the Time Warner deal. This was almost immediately shot down by CEO Randall Stephenson, the purpose of Time Warner was to bolster the DirecTV offering.

This is the conundrum which the executive team is facing. The long-term business plan is sound; a purchase of an excellent content creation business to marry the delivery platform could create a notable share of the entertainment segment. However, the short-term threats might well force the team into a re-think.

Last week, a coalition of investors filed a lawsuit, naming a series of AT&T executives as defendants, accusing the telco of misleading executives over the performance of DirecTV. As the success of the DirecTV acquisition was being used to justify the Time Warner acquisition, the investors seemingly feeling violated, believing the gains were exaggerated or at least the longevity of the gains.

Perhaps more worryingly however was the emergence of Elliott Management. This vulture fund specialises in seeking undervalued businesses and introducing radical changes to increase dividends and share price. More often that not, when Elliott Management gets its claws into a business, executives usually find themselves heading towards the exit and a major restructure of the strategy is put in place.

If the sources are to be believed, this might well be a move towards appeasing the criticism before the HR department starts drafting emails.

What is worth noting, is this might well turn into nothing. Rumours of this magnitude might well be true, but the idea of discussing a divestment and then actioning these ambitions are two very different points of consideration. One question which remains unanswered is who would buy the assets?

AT&T is not going to be selling the business for pennies on the pound, therefore the potential purchaser will have to have a considerable bank account. It is also less clear whether this is a complete divestment or just the satellite assets. If it is just the ‘traditional’ content business, with the streaming side attached, this looks much less attractive to a potential investor.

One option could be a sale to Dish, a rival satellite TV provider. A merger of the two entities has been quashed by competition authorities in the past, though as there is now much larger variety of content options for the consumer it might be a possibility. That said, considering Dish is working through the $5 billion acquisition of the Boost prepaid mobile brand, it might not have the appetite for another large transaction.

Although this is a move which many AT&T executives will struggle to stomach, perhaps survival instincts have kicked-in.

The acquisition of DirecTV and Time Warner was supposed to be a means of diversifying the business, chasing the ever-increasing dollars which are being spent on digital entertainment by consumers and digital advertising by corporates. This was supposed to be a move to future-proof the business and drive growth opportunities.

Without DirecTV, the entertainment unit looks quite hollow. The AT&T business will look much more like a traditional telco, one which is built around the decreasingly profitable and increasingly commoditised business of connectivity. Many companies are looking to leverage their relationship with customers with additional services, and for AT&T, this was supposed to be video.

What is worth noting, is the divestment looks unlikely at the moment. It might happen, but it might well be more sensible for a spin-off and partial divestment. This would recover funds, partially satisfying the vultures at Elliott Management, while also keeping some skin in the game. It would also allow for the appointment of a new management team, perhaps one which is more aligned with content as opposed to the current set-up which is primarily focused on telco.

However, the ability of Elliott Management to cause chaos in a business when it has outlined its intentions should not be underestimated. This is a firm which has a track-record in getting its own way and raising support from other investors. Above all else, the AT&T management team should be very concerned about their future at the telco.

Elliott’s vultures are circling AT&T

Activist investor Elliott Management has set its eyes on AT&T, suggesting the firm is bloated and undervalued, with ambitions to cut staff, clear out the leadership team and sell-off non-core assets.

In a letter sent to AT&T investors, Partner Jesse Cohn and Associate Portfolio Manager Marc Steinberg have attacked the firm and suggested a drastic turnaround strategy which includes divestments, retail location closures, job cuts and a change in mentality. It does appear shareholders are intrigued by the idea, with share price increasing 6% in pre-market trading.

“The purpose of today’s letter is to share our thoughts on how AT&T can improve its business and realize a historic increase in value for its shareholders,” the letter states.

“Elliott believes that through readily achievable initiatives – increased strategic focus, improved operational efficiency, a formal capital allocation framework, and enhanced leadership and oversight – AT&T can achieve $60+ per share of value by the end of 2021. This represents 65%+ upside to today’s share price – a rare opportunity for any company, let alone one of the world’s largest.”

For those who aren’t familiar with Elliott Management, this is not necessarily a move which is out of character.

Known as a ‘vulture fund’, the team search for businesses which it deems are undervalued and effectively enter to cause chaos. More often than not, the team suggests a complete overhaul of senior managers and a new strategy. This strategy often involves job cuts and asset stripping. Shareholders are brought on board with the promise of increased dividends and a boost in share price.

There are numerous examples where the team has attempted to muscle in on operations, with Telecom Italia (TIM) being the most relevant in recent history. At TIM, Elliott Management has been battling with Vivendi for control and a new strategy, and it does appear to be winning.

In the case of AT&T, Elliott Management is promising a 65% increase in share price by the end of 2021. This is an attractive promise as share price has barely moved over the last five years, from $34.50 on September 12, 2014 to $36.25 at the close of the markets on Friday (September 6, 2019). During this period, a high of $43.28 was experienced on August 12, 2016, and a low of $28.31 on December 21, 2018.

But how do these numbers compare to the share price of AT&T’s rivals over the last five years?

Telco Today 12 Sept, 2014 High Low
AT&T $36.25 $34.50 $43.28 $28.31
Verizon $59.06 $48.40 $60.30 $42.84
T-Mobile US $79.15 $30.83 $84.25 $25.31
Sprint $6.82 $7.00 $9.30 $2.66

Although AT&T is a dominant force in the US telco industry, it has seemingly not capitalised on the 4G revolution in the same way some of its rivals have, most notably T-Mobile US. To rub salt into the wounds, AT&T failed to acquire T-Mobile US in 2011, had to pay the largest break-up fee to date (at the time), and then provided the firm with a seven-year roaming deal and spectrum. This could perhaps be viewed as the turning point for the struggling T-Mobile US.

Another interesting assertion from the Elliott Management team is inability of the AT&T business to act in a timely fashion. This is another point CEO Randall Stephenson should be worried about, as Elliott Management claims AT&T did not deploy 4G aggressively enough and lost out to Verizon in the battle for first place. With 5G on the horizon, investors might well be worried about a repeat.

Ultimately, the biggest criticism is one of poor performance. Despite some very attractive numbers in the 90s and 00s, AT&T hasn’t really pushed on to capitalise on this momentum. In fairness, every telco around the world has suffered over the course of the last decade thanks to the growing influence of the OTTs, but this point has been conveniently ignored in the Cohn and Steinberg letter.

However, it is the acquisition strategy is one of the biggest points made.

“In recent periods, however, AT&T has embarked upon a very different sort of M&A strategy,” the letter states. “Over a series of deals totalling nearly $200 billion, AT&T built a diversified conglomerate by pushing into multiple new markets.

“In each case, the push was as significant as possible. Beginning the decade as a pure-play telecom company with leading wireless and wireline franchises, 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 telco industry has changed in the last decade, and Elliott Management clearly doesn’t agree it is for the better. In the 90s and 00s, acquisitions were connectivity orientated, while recent years have seen an aggressive push into the world of digital services, diversifying products which can be offered to the consumer.

This is one of the critical points the Elliott Management team is levying towards AT&T; its acquisition strategy has not been effective. The failure to merge with T-Mobile US is a critical point, but since that point the team has spend more than $200 billion to create a beast of a business. Some have suggested this was necessary to diversify the business in preparation for the digital economy, however this is not the opinion of Elliott Management.

We do not agree with Elliott Management here. Convergence is a sound business model which moves the telco into the value-add column. A more stringent focus on connectivity will walk the telco down the road of utilitisation, opening the industry up to more aggressive regulations and price controls. This is not the direction many telcos want to head, but Elliott Management does seem to like the profits driven out of a business which focuses on operational efficiencies and little else.

Let’s not forget the Elliott Management business model after all. Identify underperforming shares, disrupt the business model for short-term share price rises and then sell the stock, while collecting meaty dividends along the way. If Elliott Management gets it way, AT&T will be a utilitised business, with fewer assets. It might not be a competitive force in a decade, when other telcos are reaping the benefits of diversification. However, Elliott Management will not care by that point.

Perhaps the three most important points of the plan set forward by Elliott Management are:

  1. A change in strategic direction from acquisition to executive
  2. Clearing out the current management team
  3. Divestment in non-core assets

There are other points made, such as closing redundant retail locations, negotiating more authorised third-party retailers, cutting back on the over-bureaucracy, simplifying the management structure and redundancies. However, we feel the three mentioned above are perhaps the most important for investors.

By shifting from an acquisition mind-set to an execution one, and making the suggestion of divestments, it would appear the AT&T business is one which will be focused more acutely on traditional telecommunications services. The tone of the letter does not suggest Elliott Management believe the content world is one which can bring fortunes, and the way in which the team discuss the success of T-Mobile US also alludes to this new, narrowed focus.

What does this mean for the very expensive content acquisitions? Perhaps nothing, or perhaps everything. We suspect the idea from Elliott Management would be to silo each of the business units, allowing a more lasered focus on core revenues in the siloes. There might well be cross-selling opportunities, but the language used by Cohn and Steinberg suggests digital services and ambitious convergence is not on the agenda.

The proposed strategy to realise the 65% increase in share price is one of simplicity, enhancing what is currently in the armoury and taking a more traditional approach to the business of connectivity.

And while there might be thousands of nervous employees throughout the organization worried of the prospect of job cuts, the senior management team should be much more concerned. After interviewing various former-executives, Elliott Management has come to conclusion that the executive management team does not have the right skillset to tackle the challenges which AT&T is facing today.

Should Elliott Management get its way, heads could roll, and the leadership team could look remarkably different. Elliott Management is also seeking greater influence for the Board of Directors, another common play from the team. The activist investor often looks to secure positions to friendlies at the companies it has in its crosshairs, and it will certainly want to exert more control on the strategy moving forward.

If Elliott Management gains control and influence at AT&T, it could look like a very different business. The investor believes it has identified $10 billion in cost-efficiencies would can be realised through spending $5 billion. This does not account for any divestments which would be made though. AT&T might well have fewer retail locations, a smaller headcount, a new management team, a lessened focus on content and digital services and a more utilised business model in the near future.

This is only the beginning of this saga, Elliott Management will certainly have a wrestle on its hands to gain control, but it does have good form when it comes to forcing through disruption.