AT&T shares jump after activist Elliott Management takes stake, sees shares nearly doubling
For AT&T's managers and the Board charged with overseeing them, missing expectations by this magnitude may cause concern that the team does not have a handle on the business. Worse still, it calls into question whether the managers have the operational capability necessary to track and steer the complex companies under their watch. Given the scale of change that has taken place, such difficulties would not be surprising.
"AT&T shares have languished, due, we believe, to concern about the company's video business and the strategy for integrating T's wireless, video, and content assets into a cohesive whole." – Evercore, November 2018 Though the last decade has been a challenging period in terms of shareholder value, the next decade need not be. AT&T has highly valuable assets that can drive value creation – #1 or #2 positions in wireless, wireline, pay TV, and content creation and distribution. In our view, the potential of AT&T's leading assets combined with its undemanding valuation makes for a uniquely powerful upside opportunity.
There are numerous major portfolio actions that AT&T can take to unlock value, all of which should be thoroughly explored. While we look forward to sharing our initial views with the Board, the critical step is for AT&T to fully and formally embrace this review process today.To address operational performance, we believe AT&T should immediately initiate a review of its operations aided by third-party advisors.
Importantly, wireless is not the only business underperforming its profitability potential. EBITDA margins in the Entertainment Group haveby ~400bps over the past two years on a comparable basis. Such margin degradation would be disappointing in isolation, but it is particularly concerning given that it occurred alongside AT&T's claims to have identified more than $2.5 billion of synergies, or more than 500bps of margin improvement, during the same period.
We've conducted hundreds of interviews with former executives, competitors and partners, all of whom have raised the same question we have: Given AT&T's history of strategic and operational issues and the very different skills needed to manage some of these new businesses, does AT&T have the right mix of leadership at the Company?
We believe that AT&T can achieve $60+ per share of value by the end of 2021, prior to any strategic actions regarding the portfolioThrough a combination of greater strategic focus, improved operational execution, balanced capital allocation and enhanced leadership and governance, AT&T can provide exceptionally attractive returns for shareholders while improving its business.
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