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Elliott Management May Be Right About AT&T Stock

Aaron Levitt

When you’re a big company, you need to think big in order to keep on growing. That was the thought process behind AT&T’s (NYSE:T) moves into becoming not only a distributor of content but a creator of one as well. As wireless adoption slowed, T needed to significantly move the needle to continue making investors happy. Unfortunately, it may be having the opposite effect on AT&T stock.

Elliott Management May Be Right About AT&T Stock

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After struggling to integrate Time Warner into its system, never realizing the full potential of bundling as well as a few other missteps, T stock has now become the target of some very angry shareholders. That includes activist investors at Elliott Management

And Elliott may have a point.

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AT&T’s big plans haven’t come to fruition and they may never. Considering the debt that AT&T is now ladled with, it might be time to cut losses and run. For investors, AT&T stock may not be the risk-free investment they think it is. Elliott’s involvement brings many of its issues to the forefront.

AT&T’s Big Moves Aren’t Working

After the growth of the wireless boom slowed to trickle and fungibility among carriers resulted in a price war, AT&T was caught between a rock and hard place.

Owners of AT&T had grown accustomed to getting some “oomph” with their investment. The firm couldn’t go back to being a boring widow and orphan stock. So, as Verizon (NYSE:VZ) went the web route and T-Mobile (NASDAQ:TMUS) began snagging up weaker rivals, AT&T decided to copy the creator/distributor model that worked for several other cable providers.

The company set itself to be an all-in-one media and content provider. It would make the movies and then distribute them over its satellite and mobile video operations.

The problem is, while this worked for Comcast (NASDAQ:CMCSA), it really hasn’t worked so well for AT&T.

It turns out, providing cable TV services is just as fungible as wireless service. People continue to cut the cord at a fevered pace and adopt streaming instead. For AT&T’s, DirecTV this has resulted in the fleeing of subscribers. The same could be said for T’s U-Verse traditional cable service.

When AT&T first purchased DirecTV, it had 20.3 million US customers. Adding in U-verse brings the total to 26 million. After AT&T reported earnings in the second quarter, that number had dipped to just 21.6 million. That’s a 17% drop since the DirecTV buyout.

Whoops.

This is a huge issue if your entire future is based on getting people to watch your produced movies and T.V. shows on your exclusive networks. With people fleeing AT&T’s distribution platform, the big buyout of Time Warner starts to make less sense. It can’t just offer that content to its subscribers because there are no subscribers left. In order to justify the purchase of Time Warner, you have to lose the exclusivity. And once you do that, the model is broken.

AT&T Gets a Letter From Elliott

All of this brings us to Paul Singer and Elliott Management. The activist shop disclosed a $3.2 billion stake in the firm and sent a strongly worded letter to AT&T’s management indicating that its recent blunders have hurt shareholders.

In its letter, Elliott partner Jesse Cohn and associate portfolio manager Marc Steinberg wrote that AT&T should sell some of its non-core businesses such as its Mexican wireless operations. More importantly, it should cut DirecTV loose either via a spin-out or asset sale. Likewise, AT&T needs to focus on being more profitable and generate more revenue per employee. Something rival Verizon does well. Also on the menu was increased buyback and dividend programs.

If management at AT&T complied and work with Elliott’s suggestions, AT&T stock could be worth north of $60 per share by 2021. That would be a roughly 65% gain from recent closing prices.

Elliott Has a Point with AT&T

The reality is, Singer and Elliott have a point with their demands. The buyout of DirectTV literally happened at the peak of cable T.V. and the beginning of streaming television.

Since then, firms like Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS) have started to eat traditional TV’s lunch. This is evident by the drop in AT&T’s subscribers, and the company can’t seem to compete. It’s latest streaming efforts after DirectTV Now was bust is a new streaming service that looks just like cable tv and costs a staggering $93 a month.

This isn’t a smart business, especially considering the massive debt AT&T took on to do all of this. The firm spent $67 billion purchase DirecTV and another $109 billion in order to complete the buyout of Time Warner. That’s insane. What’s worse is that T is going to have to spend a ton in order to build-out its 5G network in order to compete with VZ and TMUS. That will just put more debt on the pile.

So, stopping the bleeding makes sense. Spinning out DirecTV along with some of that debt could significantly reduce AT&T’s burden. Meanwhile, Time Warner’s assets aren’t bad. Monetizing them better and creating more partnerships with other streaming networks could lead to bigger profits down the road from the division. The key is that the exclusivity is not going to happen.

A Longer Road for AT&T Stock

In the end, AT&T’s big plans haven’t worked out and shareholders have suffered. Elliott may be on to something by “cutting the cord” and freeing AT&T from the DirecTV shackles.

Investors seem to like the idea as AT&T stock jumped at the announcement that the firm had taken a stake. The question is, whether or not, Elliott is able to make good on its ideas and get T’s management to budge. In the meantime, investors may not want to stick around to find out.

Disclosure: At the time of writing, Aaron Levitt did not have a position in any stock mentioned.

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