The shares of AT&T Inc. (NYSE: T) soared $0.79 or 2.15% to close at $37.58 yesterday after activist investor Paul Singer’s Elliott Management took a $3.20 billion stake in the telecom company’s stock. It is the largest investment ever made by Elliott Management. The closing price represents AT&T’s best performance on Wall Street since 2009.
Elliott estimates that AT&T could be worth a minimum of $60 per share if the telecom firm manages the company in a better manner. The hedge fund, in its letter, has argued that AT&T can “improve its business and realize a historic increase in value.”
Elliott’s letter reads as follows: “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.”
Elliott is not comfortable with AT&T’s recent takeover of Time Warner. The Elliott team has stated that “AT&T has yet to articulate a clear strategic rationale for why AT&T needs to own Time Warner.”
AT&T’s $85 billion takeover of Time Warner is regarded as one of the largest acquisition deals and has been praised as a smart investment in the media world. Skeptics, however, point out that the merged entity would face a debt burden of roughly $180 billion, up 12% from AT&T’s previous responsibility.
Along with the worries over debt load, Elliott’s letter makes several crucial points:
- AT&T’s returns have failed to impress shareholders for several years.
- AT&T’s poor merger and operational strategy are primarily responsible for the poor performance.
- AT&T holds “world-class” assets, which are traded at a huge discount.
- AT&T can “unlock significant value” by enhancing administration and operational performance.
Elliott believes that the suggestions provided above will boost gain for shareholders.
The Downtown Dallas, Texas-based company, responded to the hedge fund’s letter by saying that its Board and management team “maintain a regular and open dialogue with shareholders and will review Elliott Management’s perspectives in the context of the company’s business strategy.”
AT&T, headquartered at Whitacre Tower, issued the following statement, in response to Elliott’s stake purchase and suggestions for better performance: “We look forward to engaging with Elliott. Indeed, many of the actions outlined are ones we are already executing today. AT&T’s Board and management team firmly believe that the focused and successful execution of our strategy is the best path forward to create long-term value for shareholders.”
Jonathan Chaplin, an analyst at New Street Research, stated that the investment research firm has been disappointed with the overall company’s strategy, even though it has potential in some sections of the business. Chaplin said, “We just despaired of it ever being captured under this management team with the strategy they’ve deployed up until now.”
Chaplin further stated that it would be better to split the company into three parts as there is a lack of synergies between various divisions. Chaplin said: “If I was in the corner office of AT&T today, to be honest, I’d be looking at breaking up the company back into its three constituent parts. I honestly don’t believe that there are synergies between the wireless business, the TV distribution business and the media business.”
Elliott, similar to other activist investor run companies, take a stake in what they trust are undervalued enterprises and then campaign for major changes in operations. Requests can range from a change in corporate strategy to overhaul of management teams and even board members.
Notably, Elliott has the financial muscle and influence to take over an entire company, instead of raising a voice for small changes as a minority shareholder. As a result, investors anticipate major changes will happen in the months to come. That is expected to keep the stock bullish in the short-term.
The price chart indicates that the stock is moving along the ascending trend line. Additionally, the MACD indicator is also making new highs. As a result, we can expect the stock to appreciate further in the near-term.
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