(Bloomberg) -- Randall Stephenson has staked his legacy as AT&T Inc.’s leader on a high-stakes gamble: that he could transform an aging phone giant into what he calls “a modern media company.”
Now, activist investor Elliott Management Corp. is putting pressure on Stephenson by criticizing the blockbuster acquisitions that he oversaw -- and casting fresh doubts on whether AT&T can merge its way to prosperity.
The CEO’s future at the 134-year-old business may hinge on assuring investors that he has the correct vision.
“Elliott is making points in a very public way that a lot of people -- everybody that I know -- talks about: Is the strategic direction that Randall has pushed on the company the right idea?” said Michael Mahoney, senior managing director at investment adviser Falcon Point Capital.
Elliott’s intervention sent AT&T shares up as much as 5.2% on Monday, their biggest intraday rally in more than a decade. The stock later pared its gain to close up 1.5%, then rose as much as 1.9% Tuesday.
Since becoming CEO in 2007, Stephenson has pushed AT&T into the entertainment industry as a way to diversify away from a slowing wireless business. At the heart of his strategy: a view that the future of entertainment will be consumers watching video on smartphones.
He spent $85 billion last year to buy Time Warner, a megadeal that capped a career of megadeals. The Oklahoma City native -- he still speaks with a drawl -- had previously helped build AT&T into the largest pay-TV provider in the U.S. and the second-largest wireless carrier. The media properties of Time Warner, including HBO, CNN and Warner Bros., were the next frontier.
But the buying spree has turned AT&T into the world’s most indebted company -- not counting financial firms and government-backed entities -- and has done little to boost its stock price. Since AT&T acquired DirecTV in 2015, its shares are up about 7%, while the S&P 500 has climbed 43%.
Elliott disclosed a $3.2 billion stake in AT&T on Monday and sent a letter to the board that questioned its purchase of Time Warner. The hedge fund also suggested AT&T consider divesting assets like the struggling satellite-TV provider DirecTV.
Elliott’s letter calls the acquisition of DirecTV “ill-timed” and points to the satellite provider’s large subscriber losses. Millions of cord cutters are dropping their expensive TV packages in favor of cheaper online options, and that’s hit satellite providers the hardest.
No Clear Reason?
The firm also slammed AT&T for failing to “articulate a clear rationale” for why it bought Time Warner. The letter cites recent comments by former Time Warner CEO Jeff Bewkes, who told CNBC that the idea of a company owning both content and distribution is “a fairly suspect premise.”
AT&T plans to review Elliott’s recommendations, but said that it’s “already executing” some of the belt-tightening ideas. Elliott is likely to need the backing of other investors since its newly disclosed stake in AT&T is about 1.2% of the company’s total market value.
Analysts say it may be too early to pass judgment on AT&T’s purchase of Time Warner, which was only completed in June 2018. AT&T will soon unveil a new streaming video service called HBO Max that will compete with Netflix Inc. and be a key test of whether the Time Warner purchase was a smart acquisition.
The letter not only questions Stephenson’s strategy. It also raises concerns about the depth of his bench, citing the recent departures of former Time Warner executives and AT&T’s John Donovan, who oversaw AT&T’s phone and technology divisions.
Elliott wants AT&T to add new board members and separate the role of chairman and CEO. Stephenson holds both titles. Those changes will be the hardest for AT&T to agree to because it’s “an acknowledgment of past failures and arguably would alter the current plan that has been put in place,” said Colby Synesael, an analyst at Cowen & Co.
Stephenson, 59, is a lifer at AT&T. His path to the CEO job began in Oklahoma, where he joined Southwestern Bell in 1982. It was his first job out of college.
He gained a reputation as a consummate dealmaker. He’s known for keeping a list of dozens of potential takeover targets in a spreadsheet, which he would peruse on his iPad. When other executives might grab a magazine as they board an airplane, Stephenson works his list, people familiar with the matter said in 2016.
It’s a trait that’s been celebrated over the years, but is now drawing fire.
If Elliott builds a case against AT&T’s current management, Stephenson won’t be the only one at risk. John Stankey, the No. 2 executive at the Dallas-based company, runs WarnerMedia -- and it will be hard for him to avoid criticism directed at that division. Stankey was given the title of president and chief operating officer last week, establishing him as Stephenson’s heir apparent. He remains CEO of the media business, a state of affairs that puzzled Elliott.
“Instead of conducting a thorough search for the most qualified executives available,” Elliott complained in its letter, AT&T announced that the “CEO of WarnerMedia -- itself a massive and very different business that clearly requires a full-time manager -- would now also be responsible for an additional $145 billion of revenue as the president and COO of the entire company.”
Ultimately, Stephenson’s tenure may be judged less on the perceived missteps in Elliott’s letter and more on a fundamental financial question: Can AT&T afford it all?
The company had $194 billion in total debt at the end of June, a legacy of the M&A spree. At the same time, AT&T’s dividend is a key prize for investors. Trimming it would surely cause a backlash.
“At the heart of all this is they have a huge debt load they have to pay down and a dividend to pay and stock buybacks, so how do you fund it all?” said John Butler, an analyst at Bloomberg Intelligence.
(Updates with shares in fifth paragraph.)
--With assistance from Olga Kharif.
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