18 Oct

Will AT&T and Elliott Management Find Common Ground?

WRITTEN BY Vineet Kulkarni

Activist investor Elliott Management criticized AT&T (T) and pressed for some strategic changes last month. Both of the parties are discussing the changes, according to a Reuters report on Thursday. AT&T stock rose in the after-market session on Thursday. Will there be a resolution between the two parties or will there be new differences?

Will there be a truce?

Hedge fund Elliott Management disclosed a $3.20 billion stake in AT&T last month. The hedge fund sternly criticized the telecommunication and media conglomerate due to its acquisitions in the last few years. Elliott Management also suggested divesting some non-core assets and paying back debt aggressively in order to unlock value.

Will AT&T and Elliott Management Find Common Ground?

Elliott Management pushed to divest DIRECTV, which AT&T bought for $67 billion including debt in 2015. However, AT&T’s CEO, Randall Stephenson, clarified that he doesn’t plan to sell DIRECTV. In the latest investor update, AT&T seemed optimistic about its premium subscriber trends in DIRECTV for 2020.

The pay-TV provider has been losing subscribers since its purchase due to cord-cutting. Recent reports show that the company lost 778,000 traditional video customers in the second quarter compared to 262,000 losses in the second quarter of 2018.

Elliott Management also attacked AT&T’s board for its Time Warner acquisition for $109 billion in 2016.

Job cuts

Elliott Management’s proposed divestiture of non-core assets puts thousands of AT&T jobs at risk. On October 10, Senator Elizabeth Warren pressed AT&T to reject Elliott Management’s restructuring plan. The plan would lead to job cuts. Warren is a potential Democratic candidate for the presidential election in 2020.

The CWA (Communication Workers of America), which represents a large worker base at AT&T, also urged the company to reject Elliott Management’s plan early this month. The CWA’s president, Cristopher Shelton, slammed Elliott Management. He said that the strategy is an “archetype ploy of vulture capitalists. AT&T must reject Elliott’s outdated corporate raider strategy that destroys jobs and long-term value.”

AT&T’s third-quarter earnings

AT&T is scheduled to release its third-quarter earnings on October 28. Apart from the bottom-line figure, we’ll have to see management’s stance on the activist investor’s campaign.

Based on analysts’ estimates, the company will report an EPS of $0.93 for the quarter ending on September 30—an increase of 3.6% compared to the second quarter of 2018. To learn more, read What’s Expected for AT&T’s Third-Quarter Earnings.

On October 9, AT&T announced its plans to sell telecom operations in Puerto Rico and the US Virgin Islands to Liberty Latin America (LILA). So far this year, AT&T has announced or completed more than $11.0 billion in asset sales, which bodes well for its huge debt burden.

According to Reuters on Thursday, AT&T is about to close a deal to sell Central European Media to the Czech investment group PPF. AT&T holds about 64% in Central European Media’s common shares and has a market capitalization of $1.13 billion.

AT&T’s market performance

Activist investor Elliott Management expects AT&T stock to reach $60.0 by the end of 2021 if it adopts the restructuring plan. The stock has a potential upside of almost 60%. Brokerage house Bernstein initiated coverage on the stock with a “market perform” rating and a target price of $36.00.

The stock has risen more than 32%, while the S&P 500 (SPY) has risen around 20% this year. Currently, the stock is trading close to its 52-week high. The stock has rallied approximately 41% since its 52-week low of $26.80 in December last year.

Even though the stock has outperformed broader markets this year, it has significantly lagged the S&P 500 over a longer period. For instance, AT&T has returned 155% including dividends over the last ten years. The S&P 500 has returned 236% during the same period.

Currently, the company is trading at a dividend yield of 5.5%, which is notably higher than the S&P 500. T-Mobile (TMUS) stock has gained 20% year-to-date.

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