AT&T’s CEO Appeased Activist Investor Elliott Management

Randall Stephenson charmed AT&T's sometimes ornery hedge fund foil.

No one doubts AT&T CEO Randall Stephenson is a consummate dealmaker, but his latest coup may be the most impressive in his 12 years running the company.

Alongside his company’s third-quarter results on Monday morning, Stephenson delivered a deal to appease activist hedge fund Elliott Management, which had been demanding a shakeup at AT&T since amassing a $3 billion stake in it and sending a critical letter to the board on Sept. 9.

Satisfying Elliott, run by billionaire investor Paul Singer, was no easy task given the fund’s prior history of going after under-performing stocks with tough tactics, sometimes pushing for new leadership. Instead of attacking back, Stephenson used some of his Oklahoma charm on the Elliott crew, negotiating a deal that satisfied the activists without giving up his vast strategic vision to unite communications and entertainment in one huge corporate effort or changing his goal to be succeeded by current AT&T president John Stankey. Analysts say much of what AT&T agreed to do, like buy back more stock, was already likely.

And the plan worked: Elliott issued a statement commending the company and praising its dedication to creating shareholder value. That represented quite the turnabout, as the hedge fund’s original letter was deeply critical of all of Stephenson’s major moves, calling AT&T “a sprawling collection of businesses battling well-funded competitors.”

Under Monday’s deal, Stephenson and his team agreed to stop making big acquisitions (which they couldn’t do in any event due to the company’s heavy debt load) and pledged to reevaluate both the large and small ones they’d already made with an eye on divestures (without promising to actually divest anything major). They also offered a series of promises around future spending and profits in line with Elliott’s views. Stephenson himself agreed to stick around as CEO at least until the end of 2020, just a 14-month commitment.

None of the moves addressed the heart of Elliott’s original critique that AT&T had gotten too big and too diverse. And Stephenson’s pledge to stick around through 2020 still leaves likely successor John Stankey poised to take over next despite Elliott’s concerns about him.

In a statement accompanying Monday’s deal, Stephenson defended his strategic priorities and also praised Elliott for its suggestions. “The strategic investments we’ve made over the last several years have given us the essential elements to meet growing demand for content and connectivity,” he said. “I’ve found our engagement with Elliott to be constructive and helpful, and I look forward to continuing those conversations.”

Elliott partner Jesse Cohn and associate portfolio manager Marc Steinberg said they completely supported AT&T’s moves. “We have closely evaluated the company’s three-year plan and support the steps toward a faster-growing, more profitable, focused and shareholder-friendly company,” they wrote in the fund’s statement released on Monday.

Measured by an extremely short-term metric, the deal had the desired effect sought by both sides. AT&T’s stock price, which had gained only 3% since Elliott went public with its letter, jumped 5% in afternoon trading on Monday and hit its highest intraday price in almost two years. Still, at under $39 a share, the stock price has a long way to go before hitting Elliott’s target of $60.

And some long-time analysts who follow AT&T were unimpressed with the terms of the deal and the accompanying financial guidance, such as promising to increase earnings per share to $4.50 or more by 2022.

“It’s hard to be too optimistic that their rosy guidance is achievable or that their dividend is sustainable over more than the next few years,” Craig Moffett wrote after the deal was announced in a note titled “Hope is Not a Strategy.”

Barclays analyst Kannan Venkateshwar offered a similar take, noting that meeting the goals would require “a lot of hard work.” AT&T’s current circumstances don’t offer much reason for optimism, he added: “The company providing long-term guidance of growth in a quarter where it lost 1.4 million video subscribers, likely more than the rest of the industry combined.”

Here’s a simple scorecard of some of Elliott’s demands and what AT&T conceded:

Full review of AT&T’s portfolio

The company agreed to “actively review its portfolio” with an eye towards selling “non-core assets.” No promise to divest any major business.
Verdict: TBD, but possibly meeting.

End growth through acquisitions strategy

AT&T agreed to stop making major acquisitions.
Verdict: Met

Improve financial performance

Elliott wanted AT&T to improve its profit margin on earnings before interest, taxes, depreciation, and amortization, or EBITDA, by 3 percentage points by 2022 through spending cuts and improving efficiencies. AT&T promised only to improve by 2 percentage points and said one-third to half of the improvement would come from increasing growth rates in businesses such as advertising, wireless, and home Internet service.
Verdict: Not met.

Pay down debt

Elliott wanted substantial debt reduction. The company said it would pay down all of the debt accumulated from the acquisition of Time Warner by 2022 but without quite reaching the level of indebtedness requested by Elliott.
Verdict: Partially met.

Pursue more stock buybacks

Elliott wanted AT&T to spend half of its cash flow remaining after paying stock dividends on stock buybacks. AT&T said it would spend 50% to 70% of its cash flow after paying its dividend, or about $30 billion over the next three years, on stock buybacks.
Verdict: Met

Add expertise to board

The company said it would fill two upcoming board vacancies with people who have technology and other relevant experience.
Verdict: Met

Improve corporate governance

Elliot wanted AT&T’s board to separate the titles of CEO and chair. After Stephenson, who currently holds both titles, departs, the company will appoint two different people to the two jobs.
Verdict: Met, eventually

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