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11 September 2019

Activist investor pushes for new approach at AT&T

Activist investors have periodically had a dramatic effect on the mobile industry by driving change, and often break-up, of large players. Some, like Carl Icahn, have sparked the disappearance of once-dominant companies, notably Motorola; others, like Jana Partners have tried to drive break-ups (Jana, however, failed to spark the break-up of Qualcomm in 2015).

Elliott Management is one of the most prominent activist investors, and has taken a strong interest in telecoms. For instance, it became the second largest shareholder in Telecom Italia (TIM) and has pushed for radical restructuring of the challenged operator. As a stakeholder in Dutch chipmaker NXP, it was instrumental in pushing for a higher price when Qualcomm was bidding for it (the acquisition subsequently failed). And it has agitated for Juniper to offload more assets.

Now, it has turned its attention to AT&T, acquiring $3.2bn worth of stock to become the sixth largest shareholder (though it only owns 1.2% of the total). The company, founded by billionaire Paul Singer, said AT&T was in “prime position to be the early market leader in 5G”, but rather than endorsing the telco’s own transformation and commercial approach as the reasons for its opportunity, it is pursuing the classic hedge fund formula of dramatic cost-cutting and possible break-up.

To maximize its 5G opportunity, AT&T must slash costs, offload non-core businesses and make further changes to senior management, it said (the last of these is already underway with the retirement of John Donovan as head of the Communications business, though it is unclear whether that has any relation to the Elliott intervention).

In a public letter to AT&T shareholders, Elliott criticized many of AT&T’s recent decisions, especially its M&A strategy, from the failed bid for T-Mobile USA to the recent acquisition of Time Warner.

“We firmly believe that AT&T’s M&A strategy has not only contributed directly to its profound share price under-performance, but has also caused distractions that have contributed to the company’ recent operational underperformance,” Elliott wrote. “Verizon pursued the opposite path by reducing its wireline footprint and doubling down on the strong wireless market. … Last year the gap in service EBITDA margins increased to about 1,500bps on a comparable basis with historical periods, the largest discrepancy to date and a substantial difference in profitability.” (This argument seemed to ignore Verizon’s much-criticized purchases of AOL and Yahoo.)

AT&T provided a po-faced response, saying: “We look forward to engaging with Elliott. Indeed, many of the actions outlined are ones we are already executing today.”

President Trump managed to get involved, tweting that it was “great news that an activist investor is now involved” with AT&T.