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AT&T chief's drive to create 'modern media company' under threat

Activist investor Elliott Management criticises his blockbuster acquisitions

Elliott disclosed a US$3.2 billion stake in AT&T on Monday and sent a letter to the board that questioned its purchase of Time Warner.

New York

RANDALL Stephenson has staked his legacy as AT&T Inc's leader on a high-stakes gamble: that he could transform an ageing phone giant into what he calls "a modern media company".

Now, activist investor Elliott Management Corp is putting pressure on Mr Stephenson by criticising 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.

Since becoming CEO in 2007, Mr 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 US$85 billion last year to buy Time Warner, a megadeal that capped a career of megadeals. The Oklahoma City native had previously helped build AT&T into the largest pay-TV provider in the US 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 and has done little to boost its stock price. Since AT&T acquired DirecTV in 2015, its shares are up about 7 per cent, while the S&P 500 has climbed 43 per cent.

Elliott disclosed a US$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 favour of cheaper online options, and that has hit satellite providers the hardest.

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 is "already executing" some of the belt-tightening ideas. Elliott likely will need the backing of other investors since its newly disclosed stake in AT&T is about 1.2 per cent 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 Mr 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. Mr Stephenson holds both titles. Those changes will be the hardest for AT&T to agree to because it is "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.

Mr 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 is 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, Mr Stephenson works his list, people familiar with the matter said in 2016. It is a trait that has been celebrated over the years, but is now drawing fire.

If Elliott builds a case against AT&T's current management, Mr Stephenson will not 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. Mr Stankey was given the title of president and chief operating officer last week, establishing him as Mr 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 US$145 billion of revenue as the president and COO of the entire company." BLOOMBERG