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AT&T, Activist Investor Strike Truce -- WSJ

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10/29/2019 | 01:48am EST

Telecom provider says it will avoid big deals for now after Elliott criticized its strategy

By Drew FitzGerald and Corrie Driebusch 

AT&T Inc. reached an agreement with an activist investor that had been pressuring the telecom giant to revamp its strategy, and said its chief executive would stay at the helm through next year.

Chairman and CEO Randall Stephenson has used big acquisitions of Time Warner and DirecTV to turn AT&T into a major media provider, a shift that activist Elliott Management Corp. had called into question. Mr. Stephenson said Monday that AT&T would forgo big takeovers in the coming years to focus on improving the bottom line.

"I believe we're on the threshold of something really remarkable in terms of the next chapter of AT&T's storied history," Mr. Stephenson said Monday during a conference call with analysts. "I have every intention of being here."

The company reported another quarter revealing the challenges of moving beyond its traditional telephone business. Overall, quarterly profit and revenue declined from a year earlier. AT&T's core cellphone business gained subscribers, but more than one million customers abandoned the company's DirecTV unit.

Cord-cutting has sapped the satellite-television provider, putting greater importance on AT&T's plan for a new streaming service called HBO Max that can compete with Netflix Inc. and other new video services. Executives said Monday they plan to spend $2 billion next year to launch the service, which they intend to unveil on Tuesday.

AT&T's peace deal with Elliott includes a commitment to stock buybacks and a plan to appoint two new directors to its board. The board, led by Mr. Stephenson, has 13 members. AT&T will nominate the new appointments; they will succeed retiring board members, over the next 18 months.

The company pledged to conduct a review of its portfolio and pay down debt from its 2018 takeover of Time Warner. AT&T also agreed to separate the roles of chairman and CEO when Mr. Stephenson, age 59, retires. He has led the telecommunications operator since 2007 and had recently discussed stepping aside as soon as next year, The Wall Street Journal has reported.

Elliott, for its part, said it supports AT&T's "steps toward a faster-growing, more profitable, focused and shareholder-friendly company."

The hedge fund has no restrictions on its ability to publicly criticize the company in the future. Typically, in a settlement, an activist investor makes commitments as well, such as promising to not wage a proxy fight or keeping out of the public eye in exchange for some of its demands.

The resolution was unusually swift. Elliott issued a 23-page letter challenging AT&T's strategy of building a media conglomerate just seven weeks ago.

The deal solves problems for both sides. AT&T avoids a distracting fight with Elliott, an aggressive investment fund led by billionaire Paul Singer. Elliott, for its part, might profit from the concessions the company is offering without having to mount a costly proxy battle.

Shares in AT&T rose 4.3% to $38.49 on Monday.

In the third quarter, the Dallas company's entertainment division shed 1.4 million pay-TV customers. The losses included 1.2 million satellite and fiber-optic-TV customers and 195,000 subscribers at AT&T TV Now, the online channel bundle once called DirecTV Now.

AT&T's wireless wing delivered a steadier performance, notching a gain of 101,000 postpaid phone subscribers, a valuable category of customers who pay for service at the end of the billing cycle. Rival T-Mobile US Inc. added 754,000 such subscribers in the quarter, while Verizon Communications Inc. added 444,000.

AT&T reported a profit of $3.7 billion for its latest quarter, down 22% from $4.72 billion a year earlier. Revenue fell 2.5% to $44.6 billion, with declines across business units.

New Street Research analyst Jonathan Chaplin said the quarterly results missed Wall Street projections in almost every category, but the company compensated for that with a profit outlook through 2022 that beat expectations "by a country mile."

The company's three-year capital-allocation plan released Monday would retire all of the debt acquired from its Time Warner purchase. The plan calls for AT&T to spend 50% to 70% of its free cash flow after dividend payments on share buybacks.

As the company looks to divest noncore assets, Mr. Stephenson said during Monday's call that "there are no sacred cows."

Regarding DirecTV, he said the struggling satellite-TV business will remain important to AT&T's strategy, though he added, "we'll approach it with a fresh set of eyes" and "we'll evaluate multiple options," including partnerships, and other structures as needed.

AT&T became what its CEO calls a "modern media company" in 2018 through its $80-billion-plus purchase of Time Warner, the owner of Warner Bros. studios, Turner cable channels and HBO. Executives said the deal would help AT&T attract and keep customers by offering them top-tier films and TV shows.

The company has spent the past year developing a subscription service called HBO Max, an online-only package of content from the premium TV brand as well as Warner Bros. movies and TV-audience favorites such as "Friends." The company plans to demonstrate the new service Tuesday at a Burbank, Calif., event after several setbacks that pushed the product's full commercial launch to the first half of next year. Mr. Stephenson said AT&T expects the new service to reach 50 million domestic subscribers within five years.

Its challenge is compounded by rival technology and media companies also plowing billions of dollars into streaming video sites that will get the jump on HBO Max. Apple Inc. will start showing the first TV series produced for its $4.99-a-month TV+ service on Nov. 1. Walt Disney Co. will follow on Nov. 12 with Disney+, a library packed with popular movies from Marvel, "Star Wars" and its namesake studio for $6.99 a month.

Write to Drew FitzGerald at andrew.fitzgerald@wsj.com and Corrie Driebusch at corrie.driebusch@wsj.com

Stocks mentioned in the article
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APPLE INC. -1.06% 320.32 Delayed Quote.10.21%
AT&T 0.45% 38.615 Delayed Quote.-1.64%
NETFLIX, INC. -0.09% 386.19 Delayed Quote.19.84%
T-MOBILE US -0.67% 99.65 Delayed Quote.28.14%
VERIZON COMMUNICATIONS -0.17% 58.1256 Delayed Quote.-5.68%
WALT DISNEY COMPANY (THE) -0.67% 140.37 Delayed Quote.-3.80%
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Financials (USD)
Sales 2020 182 B
EBIT 2020 31 874 M
Net income 2020 19 375 M
Debt 2020 148 B
Yield 2020 5,43%
P/E ratio 2020 14,0x
P/E ratio 2021 12,8x
EV / Sales2020 2,34x
EV / Sales2021 2,31x
Capitalization 279 B
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Technical analysis trends AT&T
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Income Statement Evolution
Mean consensus OUTPERFORM
Number of Analysts 32
Average target price 40,07  $
Last Close Price 38,44  $
Spread / Highest target 24,9%
Spread / Average Target 4,24%
Spread / Lowest Target -48,0%
EPS Revisions
Randall L. Stephenson Chairman & Chief Executive Officer
F. Thaddeus Arroyo CEO-Business Solutions & International
Jennifer van Buskirk Regional President-Northeast
David Christopher President-AT&T Mobility & Entertainment
John T. Stankey President & Chief Operating Officer
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