Elliott, which also set up a website, said AT&T’s stock has underperformed the broad market by “over 150 percentage points” for the last 10 years, while its total shareholder return (TSR) is 100 percentage points lower than the S&P 500. The activist blamed the poor performance on “strategic setbacks,” including large acquisitions such as Time Warner in 2018 and DirecTV in 2015 for a combined $152 billion, and “operational underperformance.”
“These three transactions [Time Warner, DirecTV and T-Mobile, which was killed by the U.S. Justice Department on antitrust grounds] are not the only examples of AT&T’s recent questionable M&A – the push into the Mexican wireless market, for example, has also severely underperformed expectations – but they are the largest and most damaging,” Elliott said in the letter.
On the operational side, Elliott said AT&T “consistently fell behind” in wireless as competitors delivered “on network quality commitments, executed on new technology deployments and innovated with disruptive offerings.” The company has also struggled with “human capital issues, including talent retention, recruitment and leadership more broadly,” Elliott said.
Elliott, which engaged a few consulting firms and spoke with 200 industry executives to build its thesis, said the firm should divest non-core assets, institute capital discipline and “aggressively” de-lever, while enhancing “leadership and oversight.” The investor believes this way AT&T “can improve its business and deliver historic value creation for all stakeholders.”
AT&T responded by saying it was ready to engage with Elliott but that it believed its collection of businesses to be “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,” the company said in a statement.
The conglomerate hired Goldman Sachs to help in its defense against Paul Singer’s fund, the New York Post reported on Monday. Goldman’s Kurt Simon, who previously headed the telecom investment banking team at J.P. Morgan and helped AT&T buy Time Warner last year, could assist the company in its efforts to thwart the activist’s challenge.
Meanwhile, U.S. President Donald Trump, a frequent critic of Time Warner’s CNN, tweeted that it was “Great news that an activist investor is now involved with AT&T.”
Activist Insight Vulnerability reported in 2017 that AT&T might become a target for activist shareholders, amid negotiations to acquire Time Warner. “An activist may seek to stall the company’s M&A strategy and push for a focus on the bottom line and deleveraging,” Activist Insight Vulnerability said at the time. “An activist investor could emerge even if the government blesses the deal. At $107 per share at the time of the merger announcement, Time Warner is too expensive, despite the strategic benefits of acquiring a vertical supplier. In the five days following the October 2016 announcement, AT&T’s stock dropped around 7%, while the S&P 500 posted flat gains, indicating investors believed the company was overpaying for Time Warner.”
Elliott said there are a lot of assets that the company could divest, including regional sports networks, CME, Sky Mexico, the Latin American pay TV business, although it made clear that it did not want to “preordain” the results of a potential strategic review.
Elliott’s stake is one of its largest-ever investments but is some way behind Pershing Square Capital Management’s $5.5 billion investment in Mondelez in 2015.