Letter Highlights Compelling Value-Creation Opportunity, $60+ per Share of Value
“Activating AT&T” Plan Recommends Increased Strategic Focus, Improved Operational Efficiency, Disciplined Capital Allocation, and Enhanced Oversight
Plan Offers Substantial Benefits for Shareholders, Consumers and Employees
Full Letter Available at ActivatingATT.com
NEW YORK–(BUSINESS WIRE)–Elliott Management Corporation (“Elliott”), which manages funds that collectively beneficially own $3.2 billion of AT&T Inc. (“AT&T” or the “Company”), today released a letter outlining a compelling value-creation opportunity at AT&T. The letter, addressed to the Company’s Board, noted that the opportunity could lead AT&T to a $60+ per share value by the end of 2021, representing a 65%+ upside to today’s share price.
According to the letter, Elliott made the investment in AT&T – among its largest ever – because it exhibits a unique combination of historical underperformance, a depressed valuation, well-positioned assets and a clear path forward to generate extraordinary value for shareholders and other stakeholders.
Over the past decade, AT&T’s shareholder returns have underperformed the S&P 500 by well over 100 percentage points. This share-price underperformance has occurred as AT&T’s M&A strategy has taken it into multiple new markets over a series of deals totaling nearly $200 billion, and as its operational performance has measurably declined. As a result, AT&T today is deeply undervalued, trading at just over half the multiple of the S&P 500 – by far its biggest discount yet.
Despite these setbacks, Elliott believes that AT&T possesses a world-class collection of assets, each with a leading market position, priced today at historically discounted levels. The letter notes that this irreproducible collection of leading businesses includes a well-performing wireless business poised for future growth and market leadership in 5G, the premier global enterprise connectivity solution, and one of the world’s most successful media franchises.
Elliott’s letter outlines a four-part plan – the Activating AT&T Plan – that would improve AT&T’s share price and its business. The Plan recommends increased strategic focus, improved operational efficiency, a formal capital allocation framework, and enhanced leadership and oversight. The letter states that the Plan could enable AT&T to achieve a value per share of $60+ by the end of 2021, prior to any strategic actions regarding the portfolio. Beyond delivering a higher stock price for its shareholders, both institutional and employee, the letter states that a more focused and efficient AT&T would deliver far-reaching benefits to other stakeholder groups as well.
The letter concludes by calling for constructive engagement on a mutually agreed-upon plan to realize this unique opportunity for all AT&T stakeholders.
The letter can be downloaded at ActivatingATT.com.
The full text of the letter follows:
September 9, 2019
The Board of Directors
208 South Akard St.
Dallas, TX 75202
Attn: Chairman Randall Stephenson
Attn: Lead Director Matthew Rose
Dear Members of the Board:
We are writing to you on behalf of Elliott Associates, L.P. and Elliott International, L.P. (together, “Elliott” or “we”). Elliott owns $3.2 billion of the common stock and economic equivalents of AT&T Inc. (the “Company” or “AT&T”). The large scale of our investment reflects our deep conviction in the extraordinary value opportunity realizable at AT&T today.
AT&T is unquestionably one of the world’s most important companies and one of America’s proudest technological stories. Nearly 150 years after its founding, AT&T remains a vital steward of global infrastructure, serving more than 370 million direct-to-consumer relationships and employing more than 250,000 people across virtually every country in the world. There is a great deal at stake in ensuring that AT&T realizes its potential – for shareholders, for consumers, for employees, and even for the U.S. as a global telecom leader.
It is through this lens that Elliott approaches its investment in AT&T. Though it is outside the scope of this letter to detail AT&T’s rich and pioneering history, we want to make clear that Elliott has tremendous respect for the Company’s legacy, as well as for the hard work, ingenuity and passion of its dedicated employees, who work tirelessly to ensure our world remains connected.
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. 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.
Our letter today is organized as follows:
- Long-Term Underperformance: AT&T’s shareholder returns have been disappointing over a prolonged period.
- How We Got Here: A combination of strategic and operational setbacks has eroded AT&T’s business focus and shareholder value.
- The AT&T Opportunity: Despite the setbacks, AT&T still possesses a world-class collection of leading assets, priced today at historically discounted levels.
- The Activating AT&T Plan: AT&T can unlock significant value by focusing its asset portfolio, improving operational performance, instituting clear capital priorities, and enhancing leadership and oversight.
- Upside of a Unique Magnitude: These steps will create value that is substantial and achievable today.
Elliott looks forward to working collaboratively with the AT&T team to act on this opportunity and realize the Company’s full potential.
Elliott’s Investment in AT&T
Elliott is an investment firm founded in 1977 that today manages approximately $38 billion of capital for both institutional and individual investors. We are a multi-strategy firm, and investing in the Technology, Media and Telecom (TMT) sector is one of our most successful efforts.
Elliott’s approach to its investments is distinguished by our extensive due diligence, and our efforts on AT&T have followed this same approach. We enlisted former executives, industry experts, investment bankers, lawyers, accountants and consultants in an exhaustive diligence effort spanning AT&T’s numerous businesses. Selected examples of our efforts include:
- A leading strategy consulting firm surveyed the wireless, pay TV, and broadband preferences of more than 35,000 consumers to understand evolving consumer trends;
- A premier cost and optimization consulting firm analyzed AT&T to assess the opportunity for operational improvements and quantified the potential cost savings;
- A leading network advisory practice evaluated the evolving wireless and wireline dynamics, including AT&T’s potential path to 5G leadership;
- We engaged in conversations with more than 200 former AT&T and industry executives to accurately evaluate the current situation through the lens of AT&T and its peers; and
- We surveyed more than 60 of the largest TMT investors to gauge shareholder sentiment.
We believe that this time- and resource-intensive exercise has given us a thorough understanding of the Company’s existing strengths and opportunities for improvement. It is important to emphasize that the observations made below regarding the Company’s recent strategic and operational decisions are drawn directly from this wide-ranging diligence and reflect broadly shared views on AT&T’s recent history and required future direction. We have carefully tested the views of others against our own, and we are convinced that the resulting recommendations will both maximize shareholder value and best position AT&T for long-term success.
What has attracted our attention, as well as the attention of other shareholders – from large institutions to individual AT&T employees – has been the prolonged and substantial underperformance of AT&T as an investment relative to its potential. Over the past ten years, for example, AT&T – a “bellwether” in all senses of the word – has not only failed to keep pace with the broader market, but has actually underperformed by over 150 percentage points:
Click the following link to view AT&T’s Share Price Performance – Last Ten Years: https://activatingatt.com/image1.
This underperformance also holds for AT&T’s Total Shareholder Return (“TSR”, stock price plus dividends). Over the past decade, AT&T’s TSR has lagged the S&P 500’s TSR by well over 100 percentage points. In fact, AT&T’s underperformance has been so severe and disappointing that it was dropped from the Dow Jones Industrial Average in 2015, an index that has included AT&T and its predecessors since 1939.
Unfortunately for shareholders and the millions of current and former employees who own shares in AT&T as part of their remuneration or pension, this underperformance has been both profound and persistent. AT&T’s TSR has underperformed across all relevant benchmarks and timeframes for more than 10 years, with the exception of a small catch-up over the last year following the Company’s 27% share price decline in 2018 and coinciding with Elliott’s large purchases of stock.
Click the following link to view Relative Total Shareholder Return: https://activatingatt.com/image2.
As you can see, AT&T has been a disappointing investment for its shareholders relative to nearly any benchmark.
How We Got Here
Below, we briefly summarize the business issues that have led AT&T to its current state, which we categorize into two groups: I) Strategic Setbacks and II) Operational Underperformance. We welcome the opportunity to share more detailed thoughts on these topics in our conversations with the Board.
I. A Series of Strategic Setbacks
To fully appreciate the significance of the Company’s decisions and to contextualize them appropriately, we think it useful to revisit how AT&T first found success.
Originating in 1984 as the smallest of the Baby Bells, Southwestern Bell (later renamed SBC) quickly embarked on an aggressive yet focused strategy of growth and execution. Under the famed stewardship of Ed Whitacre, SBC radically transformed the country’s wireline and wireless industries. Over the decade between 1997 and 2007, SBC acquired Pacific Telesis, Southern New England Telephone, Ameritech, Comcast Cellular, AT&T Wireless, BellSouth and, of course, the AT&T Corporation. In doing so, the now re-named AT&T became the nation’s largest telecommunications company.
Whitacre’s strategy was successful – the Company had a clear strategic rationale for the assets it acquired and a plan to execute across the business as a whole. The results, too, differed from AT&T’s current situation: From 1984 through Whitacre’s retirement in June 2007, AT&T shares returned over 2,000%, handily outpacing the results of either the S&P 500 or AT&T’s primary competitor, Verizon. On the day Whitacre retired, AT&T’s stock price closed at $40.53, a level it remains below today.
In recent periods, however, AT&T has embarked upon a very different sort of M&A strategy. Over a series of deals totaling 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:
- T-Mobile:Possibly the most damaging deal was the one not done. In March of 2011, AT&T attempted to acquire T-Mobile for $39 billion. At the time, T-Mobile was a distant fourth-place competitor struggling to keep pace with AT&T and Verizon. Not long after announcement, it became obvious that the government would block the deal, and the parties terminated. Unfortunately for AT&T and the industry, AT&T paid the largest break-up fee of all time and provided T-Mobile with a seven-year roaming deal and the invaluable spectrum it needed to develop from a then-struggling competitor into the thriving force it is today. Over the following years, T-Mobile went on to introduce a number of disruptive initiatives that upended the wireless industry. In addition to the internal and external distractions it caused itself, AT&T’s failed takeover capitalized a viable competitor for years to come.
- DirecTV: The next large deal AT&T attempted did close, but with damaging results. In 2014, AT&T announced the $67 billion acquisition of DirecTV, becoming the largest pay TV operator in the country. Notwithstanding AT&T leadership’s assertions that “Pay TV is a very good, durable business” when the transaction was announced, the pay TV ecosystem has been under immense pressure since the deal closed. In fact, trends are continuing to erode, with AT&T’s premium TV subscribers in rapid decline as the industry, particularly satellite, struggles mightily. Unfortunately, it has become clear that AT&T acquired DirecTV at the absolute peak of the linear TV market.
- Time Warner:In 2016, AT&T announced its most significant bet, the $109 billion acquisition of Time Warner. Time Warner is a spectacular company, representing a collection of some of the world’s premier media assets, and it remains a strong and valuable franchise today. However, despite nearly 600 days passing between signing and closing (and more than a year passing since), AT&T has yet to articulate a clear strategic rationale for why AT&T needs to own Time Warner. While it is too soon to tell whether AT&T can create value with Time Warner, we remain cautious on the benefits of this combination. We think that, after $109 billion and three years, we should be seeing some manifestations of the clear strategic benefits by now. We aren’t alone in our cautious outlook – Jeff Bewkes, the CEO who sold Time Warner to AT&T, recently referred to the vertical integration of content and distribution as a “fairly suspect premise.”
These three transactions 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.
As long-time followers of Time Warner, we see a contrast between AT&T’s M&A strategy and that of Time Warner under Jeff Bewkes: When Bewkes took over Time Warner as CEO, he inherited a sprawling company with numerous related but non-core assets – AOL, Time Warner Cable, a collection of publishing assets and other smaller businesses. He then spent the following decade divesting the non-core assets in order to focus on Time Warner’s leading content franchises. This strategy paid off: Time Warner became both a flourishing media enterprise and a strong investment, returning more than double the S&P 500’s ~140% return during Bewkes’ 10-year tenure.
AT&T has been an outlier in terms of its M&A strategy: Most companies today no longer seek to assemble conglomerates. This approach is more characteristic of a prior era, calling to mind the Conglomerate Boom of the 1960s or the Mike Armstrong years at the “old” AT&T. It also represents a departure from the approach articulated in 2007 by the Company’s Chairman and CEO at his first analyst day after being named to that position: “When there’s a temptation to want to launch off into areas that may not be closely tied to our strengths or which are going to distract us from an operational focus, that won’t happen.”
We firmly believe that AT&T’s M&A strategy has not only contributed directly to its profound share price underperformance, but has also caused distractions that have contributed to the Company’s recent operational underperformance.
II. Operational Underperformance
In his final letter to shareholders in AT&T’s 2006 annual report, Whitacre opened by saying “AT&T is a company with a tradition of delivering on our promises.” During the last decade, however, AT&T has not delivered on its promises, as its radical transformation through M&A has coincided with deteriorating operational performance. As Moffett Nathanson summarized: “The decline in AT&T’s shares over the last few years has been more than just a referendum on strategy. It has also been a direct reflection of a steady decline in AT&T’s operating performance.”
Poor Execution in Wireless
When AT&T (then-SBC) acquired AT&T Wireless in 2004 through its Cingular Wireless joint venture, it became the nation’s largest wireless provider. AT&T had every right – if not a mandate – to execute well and expand its lead. Unfortunately, AT&T consistently fell behind, as competitors delivered on network quality commitments, executed on new technology deployments and innovated with disruptive offerings.
Some examples help illustrate this underperformance:
- Missed iPhone Potential: In 2007, AT&T secured exclusive distribution of the iPhone, offering its customers what should have been a unique and game-changing product experience. However, as data usage spiraled, AT&T struggled to scale its infrastructure accordingly and add sufficient capacity, resulting in well-publicized network unreliability and customer-satisfaction issues. What should have been a meaningful brand-enhancer ended up undermining public perception.
- Sacrificed Network Leadership: While Verizon moved as quickly as possible to implement 4G LTE, AT&T initially balked, essentially giving Verizon a head start. Verizon took advantage and executed well, quickly being the first to scale its LTE footprint and thereby earning a reputation for superior network quality, as well as $20 billion dollars of additional wireless revenue.
- Lack of Differential Positioning: While Verizon was winning mindshare as the network quality leader, T-Mobile was disrupting the industry by eliminating contracts while offering family plans and unlimited packages. Indeed, all competitors were in motion: Verizon took up the premium end of the market, Sprint targeted the low end and T-Mobile was the disruptive innovator. By contrast, AT&T was comparatively static, without clear brand positioning.
The primary consequence of these setbacks and others has been a consistent ceding of market share. In the last decade, T-Mobile has grown its share of the “Big 4” wireless revenues by ~600 basis points while AT&T’s share has shrunk ~400 basis points, making it the worst performer of the group.
Click the following link to view Cumulative Change in Relative Wireless Market Share by Revenue for Top Four Competitors: https://activatingatt.com/image3.
Fortunately, the ongoing 5G transition presents AT&T with a renewed opportunity to reset the wireless narrative and reclaim market leadership. AT&T 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 (driven by the FirstNet build and its one-touch strategy).
We believe AT&T will be able to quickly move forward while its main competitors remain either spectrum-disadvantaged or distracted as they integrate major transactions. However, while AT&T is well positioned, success in 5G will require meaningful investment and improved execution; anything less and AT&T risks missing this opportunity and falling behind again.
Beyond the wireless issues detailed above, AT&T has suffered from product issues in other business units that have hampered its ability to remain competitive:
- DirecTV Over-the-Top (OTT) Issues: AT&T’s OTT offering, DirecTV NOW (renamed AT&T TV Now), has been poorly executed with delays, technical mishaps, weak customer service and usability issues. Despite describing DirecTV NOW as a replacement for DirecTV, the natural-substitution narrative has not played out. While unsustainably low prices and aggressive promotion did initially help the product scale, the benefits turned out to be very short term in nature. As AT&T raised prices to normalized levels, results rapidly deteriorated. After just two years of existence amidst an otherwise-booming OTT market, DirecTV NOW’s subscriber count is now declining.
Click the following link to view AT&T Television Subscribers Since 2016 (in millions): https://activatingatt.com/image4.
- WarnerMedia Direct-to-Consumer Rollout: WarnerMedia possesses a leading library of content, and the potential for a direct-to-consumer offering has long been one of the most highly anticipated opportunities. Nonetheless, more than three years after the deal was announced, there is still confusion over strategy and a growing sense that AT&T doesn’t have a plan. Last November, AT&T laid out a detailed, three-tiered offering with an emphasis on Warner Brothers (not HBO). Then, just six months later, AT&T scrapped that plan and instead promoted a single new product, HBO Max, with radically different pricing and an already delayed launch. This quick reversal has intensified the skepticism around WarnerMedia, its OTT strategy and the management of the business itself.
Although these two recent examples are top-of-mind, they are not the only ones. Despite more than $4 billion in M&A and an even greater amount committed to ongoing investment, AT&T’s wireless operations in Mexico remain unprofitable and below expectations. The Digital Life home security product, highlighted in 2012 as a new and exciting “billion-dollar opportunity,” never lived up to expectations. Meanwhile, numerous other initiatives (mobile wallet, internet security, connected car, unified communications, hosting and many more) failed to take off. Even the overall broadband and video deployments merit scrutiny: Misjudging consumer demands for broadband speeds has rendered the original Fiber to the Node (FTTN) deployment suboptimal, while the losses at U-Verse served as a justification for the ill-timed acquisition of DirecTV.
Retention and Leadership
Beyond these execution challenges, AT&T has also struggled with human capital issues, including talent retention, recruitment and leadership more broadly. For example, almost immediately after AT&T completed its DirecTV acquisition, the entire DirecTV management team departed. These exits were cause for concern given that DirecTV was a scale asset (~$35 billion sales and 30,000 employees) operating a different technology in a television market where AT&T (through its nascent U-Verse offering) had limited experience. One can’t help but wonder whether AT&T’s difficulties at DirecTV were compounded by this lack of management continuity and experience.
Click the following link to view DirecTV Leadership at Time of Acquisition: https://activatingatt.com/image5.
WarnerMedia has similarly suffered from alarming executive turnover, a particularly troubling pattern given the very different nature of its businesses compared to those in which AT&T has historically operated. AT&T rightfully praised Time Warner’s leadership and cited its creative talent as one of the primary reasons to pursue the transaction: “The big part of the value of this transaction is Time Warner’s outstanding leadership team,” and “they are going to be very critical to the success of this business going forward.” Yet just over a year after closing the transaction, almost all of Time Warner’s former leadership has left. For a content business now owned by a telecommunications company and under the direct supervision of a lifelong telecom executive, this lack of continuity in leadership presents a real concern for investors and should be a key focus for the Board.
Elliott Management Corporation