By Tomi Kilgore, MarketWatch
Elliott Management discloses $3.2 billion stake in AT&T, outlines plan that would boost stock price above $60 in 2 years
Shares of AT&T Inc. surged in heavy volume Monday to an 18-month high, after an activist investor that recently purchased a large stake in the telecom and media giant outlined a plan that it believes will boost the stock by more than 65% in less two years.
The stock(T) ran up as much as 5.2% intraday before paring gains to close up 1.5% at $36.79, which was the highest close since March 16, 2018. Trading volume ballooned to 117.9 million shares, compared with the full-day average of about 28.8 million shares, and enough to make the stock the most actively traded on major U.S. exchanges.
In a letter to AT&T's board of directors, Elliott Management said it believes the stock's underperformance relative to the S&P 500 over the past decade has left the company "deeply undervalued."
Elliott said it's four-part value-creation plan -- Activating AT&T Plan (/) -- could create an opportunity to boost the stock price to above $60 by the end of 2021, which would take the stock above the July 16, 1999, record close of $59.19. That would represent a gain of more than 65.5% from Friday's closing price of $36.25.
Elliott disclosed in the letter that it owned a $3.2 billion stake in AT&T, which it appears to have acquired within the past three months. In Elliott's latest 13F filing with the Securities and Exchange Commission () of its equity holdings, the hedge fund founded by billionaire Paul Singer, the fund didn't own any AT&T stock as of June 30.
Elliott's four-part plan includes an improved strategic focus, significant operational improvements, a formal capital allocation framework and enhanced leadership and oversight.
The first thing AT&T needs to do is to shift its strategy away from acquisition and toward execution, Elliott said, and start this by conducting a review of its portfolio to see what it should prioritize and which business it should divest.
Among some of assets Elliott believes are non-core and should be sold or spun off include DirecTV, the Mexican wireless operations, some of its wireline footprint and "many, many more."
Elliott also recommended more aggressive cost cutting, and has identified more than $10 billion in "opportunities" for savings. And for capital allocation, Elliott said AT&T should continue to aggressively repay debt, remain committed to growing the dividend and should consistently repurchase its stock, especially since valuations are currently at the lowest levels since the financial crisis.
During the second quarter ended June 30, AT&T spent about $71.8 million to buy back 2.2 million shares, after spending $208.2 million to repurchase about 6.8 million shares during the first quarter.
Elliott pointed out that AT&T's dividend yield, currently at 5.52%, presents a "uniquely attractive opportunity," given its spread above Verizon Communications Inc.'s(VZ) current dividend yield of 4.19% and above the yield on the 10-year Treasury note of 1.62%.
Separately, Elliott pointed out that Verizon has been aggressively cutting costs, including workforce reductions, while AT&T's organization is unnecessarily complicated and inefficient. For example, recent annual reports show that Verizon's workforce fell to 144,500 at the end of 2018 from 155,400 at the end of 2017, while the number of AT&T employees increased to 268,000 from 252,000 over the same time.
AT&T's stock has gained 13.6% over the past 12 months, while Verizon shares have advanced 8.4% and the S&P 500 has tacked on 3.5%. Over the past decade, shares of AT&T have rallied 42%, while Verizon has more than doubled (up 103%) and the S&P 500 has almost tripled (up 188%).
Regarding enhanced leadership, Elliott said it has identified several leading candidates who may help as qualified directors, that it would like to discuss with the board.
AT&T responded by saying it will review Elliott's perspectives. "Indeed, many of the actions outlined are ones we are already executing today," AT&T said in a statement.
Also read: AT&T bows out of Hulu; will Comcast be next to sell its stake? ()
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Citigroup analyst Michael Rollins reiterated his buy rating while raising his price target for AT&T's stock to $42 from $37, but said that was independent of Elliott's activism efforts. He said his raised target was a result of the opportunities AT&T has to reduce debt, improve operating segments, further monetize non-core assets and improve returns to shareholders.
Analyst Jennifer Fritzsche at Wells Fargo kept her target at market perform, saying Elliott's letter shines the light on parts of AT&T's history which have resulted in the stock's compelling valuation. "However, many of the suggestions it is making (beyond management change) we believe [AT&T is already pursuing," Fritzsche wrote in a note to clients. "One area we were somewhat surprised the letter didn't dig into was the need to fix the broadband issue."
In terms of AT&T's history that has hurt the stock, Elliott laid out AT&T's "questionable" merger and acquisition strategy, in which it spent nearly $200 billion over the past decade in acquisitions that shifted the company's focus from a pure-play telecom company with leading franchises into a "sprawling collection of businesses" in new markets with different regulations and well-funded competitors.
Despite nearly 600 days passing since AT&T closed on its $109 billion buyout of Time Warner, which was originally announced in 2016, the company has yet to articulate a clear strategic rationale as to why it needs to own the media giant. "We think that, after $109 billion and three years, we should be seeing some manifestations of the clear strategic benefits by now," Elliott wrote.
Don't miss: DirecTV is proving good for AT&T's wireless business, bad for TV ().
Despite AT&T saying pay TV is a "very good, durable business" when the company announced a $67 billion acquisition of DirecTV () announced in 2014, Elliott said 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," the letter said. "Unfortunately, it has become clear that AT&T acquired DirecTV at the absolute peak of the linear TV market."
Maybe the most damaging deal was the $39 billion deal to buy T-Mobile announced in 2011, that did not close because of regulatory pressure. "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," the letter said. "In addition to the internal and external distractions it caused itself, AT&T's failed takeover capitalized a viable competitor for years to come."
-Tomi Kilgore; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
September 10, 2019 08:23 ET (12:23 GMT)
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