A Hedge Fund Becomes a Very Noisy Stakeholder in AT&T

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 Elliott Management owns a small piece of AT&T — just a fraction of the company’s $271 billion market capitalization.CreditCreditDylan Hollingsworth for The New York Times

By Michael J. de la Merced and Edmund Lee

• Sept. 9, 2019

With its $85.4 billion purchase of Time Warner last year, AT&T announced to the world that it was becoming a new kind of corporate behemoth, one that would be a force in media and entertainment while also maintaining its dominant position in the telecommunications industry.

On Monday, one of Wall Street’s biggest hedge funds expressed doubts about AT&T’s decision to go Hollywood, saying in a sharply worded letter to the AT&T board that the company had “transformed itself into a sprawling collection of businesses battling well-funded competitors.”

Elliott Management, a hedge fund with $38 billion under management, made the letter public as part of an announcement that it had taken a $3.2 billion stake in the Dallas-based AT&T.

Although its holdings represent just over 1 percent of AT&T’s $271 billion market capitalization, Elliott Management — led by the billionaire businessman and Republican donor Paul E. Singer — made a splashy entry into the ranks of company stakeholders with its 24-page letter, telling AT&T that it needed to change to bolster its share price.

Activist funds like Elliott Management often take small positions in companies with the idea of rallying other investors to their way of thinking. The Monday letter questioned whether AT&T had strayed from its mission when it acquired Time Warner, the company behind CNN, the Warner Bros. movie studio and HBO, among other properties.

While praising Time Warner, now called WarnerMedia, Elliott Management criticized AT&T’s early moves into the streaming business, saying that “more than three years after the deal was announced, there is still confusion over strategy and a growing sense that AT&T doesn’t have a plan.”

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In July, AT&T announced that its streaming service would be called HBO Max. Scheduled to make its debut next spring, it will offer more than 10,000 hours of content, including HBO hits like “Succession,” “Game of Thrones,” “Sex and the City” and “The Sopranos,” not to mention exclusive access to the sitcom “Friends.” HBO Max will compete in a crowded field of well-funded newcomers like Disney Plus and AppleTV, as well as pioneering streaming companies like Netflix and Amazon.

The hedge fund’s letter got the attention of President Trump, who used it as fuel for his longstanding grudge against the cable news network. “Great news that an activist investor is now involved with AT&T,” Mr. Trump posted on Twitter. “As the owner of VERY LOW RATINGS @CNN, perhaps they will now put a stop to all of the Fake News emanating from its non-credible ‘anchors.’” He added: “I hear that, because of its bad ratings, it is losing a fortune.”

In fact, CNN has been a consistently profitable machine and continues to generate money for its new parent company. In the first half of this year, the division under which CNN operates made more than $2.4 billion.

Mr. Trump also has connections to Mr. Singer, the founder of Elliott Management. He was once a staunch never-Trumper who raised money during the 2016 for Mr. Trump’s political rivals. Soon after the election, Mr. Singer got on board, contributing $1 million to the inauguration. In a February 2017 press briefing, President Trump said that he had just met with Mr. Singer at the White House, adding that the billionaire “has given us his total support.”

Elliott Management’s letter included data and insights from a wide variety of sources. As part of its due diligence, the hedge fund said, it has commissioned a consulting firm to survey “the wireless, pay TV and broadband preferences of more than 35,000 consumers to understand evolving consumer trends” and “more than 200 former AT&T and industry executives to accurately evaluate the current situation.”

Elliott Management went on to ask the company to stop striking new acquisitions, increase dividends and share buybacks and improve its efficiency. The fund also said it was seeking seats on AT&T’s board. Shares in AT&T rose about 1.5 percent on Monday.

While it has battled its main telecommunications rival, Verizon, in a bitter price war that has made each customer less profitable, AT&T, led by the chairman and chief executive Randall Stephenson, has acted decisively when it has come to WarnerMedia.

It put a veteran AT&T executive, John Stankey, in charge of the new division. Eight months into his tenure, the longtime HBO chief executive Richard Plepler, a gregarious figure who was known for having a way with Hollywood talent, stepped down. People familiar with Mr. Plepler’s thinking said at the time that he found that he had less autonomy as an AT&T employee. HBO had won 160 Emmys on Mr. Plepler’s watch.

Mr. Stankey named Robert Greenblatt, the former head of entertainment at NBC and Showtime, as the new chairman at WarnerMedia, a job that gave him oversight of properties like HBO, TBS and TNT.

Mr. Stankey has trimmed costs and is looking to increase profits through new business lines. In addition to unlocking higher returns on advertising, he has spent considerable time and money to create HBO Max. The service may help AT&T offer special discounts to its customers, potentially keeping them from defecting to other services.

Last week, in a vote of confidence, AT&T elevated Mr. Stankey to president and chief operating officer of AT&T, putting him in line to succeed Mr. Stephenson as chief executive. He continues serving as the chief executive of WarnerMedia.

Elliott Management wasn’t pleased with the loss of Mr. Plepler and the recent promotion of Mr. Stankey, citing “alarming executive turnover” at WarnerMedia in its Monday letter. In addition to Mr. Plepler, the company lost David Levy, who resigned as president of Turner Broadcasting, the division that includes TBS and TNT, and Kevin Tsujihara, who ran the Warner Bros. studio group before stepping down in March after accusations that he tried to get television and film roles for a woman with whom he had a sexual relationship. (When the allegations first came to light, a lawyer for Mr. Tsujihara said his client “did not have a direct role in the actress being cast in any movie.”)

The letter from the hedge fund said the executive-suite changes at WarnerMedia made for “a particularly troubling pattern given the very different nature of its businesses compared to those in which AT&T has historically operated.”

Concerning the promotion of Mr. Stankey, whom the letter referred to as “the recently installed C.E.O. of WarnerMedia,” Elliott Management noted with disapproval that he “would now also be responsible for an additional $145 billion of revenue as the president and C.O.O. of the entire company.”

AT&T has more than $149 billion in net debt and has been steadily losing television customers at another of its businesses, DirecTV. In the 12 months through March, it lost more than 1.5 million subscribers, leaving it with about 23 million. AT&T acquired the satellite TV service in 2015 for almost $50 billion. Elliott Management advised that AT&T should consider selling DirectTV, among other businesses.

With so much criticism, why did Mr. Singer’s hedge fund decide to involve itself in AT&T at all? The answer seems to come down to the possibilities of the fifth-generation cellular networks known as 5G, which brings faster-than-broadband speeds through the air. Mr. Trump has argued that 5G is critical to national security, citing its importance in his administration’s crackdown on the Chinese telecommunications giant Huawei. The transition to the new technology, the letter said, “presents AT&T with a renewed opportunity to reset the wireless narrative and reclaim market leadership.”

In an emailed statement on Monday, AT&T said: “Our management team and board of directors maintain a regular and open dialogue with shareholders and will review Elliott Management’s perspectives in the context of the company’s business strategy.”