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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.

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