Saying that by completing a handful of “readily achievable initiatives,” AT&T Inc. (NYSE: T) could increase its share price to $60, activist investor Paul Singer’s Elliot Management on Monday sent AT&T management a letter citing strategic setbacks and operational underperformance problems that need to be fixed in order to reach that 65% boost in the company’s share price.
Among the strategic setbacks Elliott cites in its letter, the “most damaging” was the failed offer for T-Mobile USA Inc. (NASDAQ: TMUS), which the firm claims turned T-Mobile from “a then-struggling competitor into the thriving force it is today.” Elliott also criticized the $109 billion deal for Time Warner, claiming that “AT&T has yet to articulate a clear strategic rationale for why AT&T needs to own Time Warner.”
AT&T’s $67 billion acquisition of DirecTV also gets whacked: “Unfortunately, it has become clear that AT&T acquired DirecTV at the absolute peak of the linear TV market.” DirecTV continues to “struggle mightily” with subscriber losses in the pay-TV industry and the satellite portion of that industry in particular.
These strategic setbacks manifested themselves in operational underperformance. Elliott claims the AT&T bungled its exclusive, four-year deal to sell the Apple Inc. (NASDAQ: AAPL) iPhone by failing to build out its infrastructure to meet the demand for more consumer capacity. AT&T also flubbed the implementation of 4G LTE networks, giving competitor Verizon Communications Inc. (NYSE: VZ) “$20 billion dollars of additional wireless revenues.” Then, as Verizon positioned itself as the network quality leader and T-Mobile nabbed the role of “disruptive innovator,” AT&T remained “comparatively static, without clear brand positioning.”
The news isn’t all bad, however. AT&T, Elliott says, “today is in prime position to be the early market leader in 5G given its premier spectrum positioning, early LTE-Advanced work and recent network improvements ….” The company just has to execute in the four areas that it has a first- or second-place market position: wireless (#2), TV (#1), wireline (#1) and media (#2).
In response to the Elliott announcement, AT&T issued its own statement with the comment that, “indeed, many of the actions outlined are ones we are executing today.” According to a Dow Jones report, Wells Fargo agrees that “many of the suggestions [Elliott] is making (beyond management change) we believe [AT&T] is already pursuing.”
Among those changes are shedding noncore businesses, increasing operational efficiency, adopting a formal allocation framework that excludes further mergers and acquisitions, and overhauling management.
Looking at the proposed capital allocation framework, in addition to an end to further mergers and acquisitions, Elliott proposes that AT&T use 50% of its after-dividend free cash flow to buy back shares and 50% to deleverage with a target of less than two times leverage by 2022.
Elliott’s letter stops short of demanding representation on the board. The firm owns $3.2 billion worth of AT&T’s stock, which reached a 52-week high of $38.07 earlier Monday morning following the announcement of the Elliott letter. Shares pulled back some to trade up about 3.1% at $37.38. The consensus 12-month price target on the stock is $35.12.
AT&T already may be taking many of the steps Elliott is demanding, but the telecom and media giant better be wary. In 2016, Elliott led a fight against the government of Argentina after seizing one of the country’s ships following a 15-year dispute over the government’s failure to repay its bonds. Argentine President Christina de Kirschner’s government fell after she defaulted on government debt rather than pay Elliot. The firm wins more often than it loses.