Summary
- The involvement of Elliott Management can help neutralize a confirmation bias.
- Some ideas brought forth could enhance AT&T's share price.
- Management vs. Elliott looks to benefit shareholders.
- The market seems to like the activist shareholder's push.
Earlier this month, I wrote an article on AT&T (T) because it was trading at 52-week highs. Then the news broke that Elliott Management bought a stake in the company and is pushing for changes. This pushed the shares up even higher and gave cause to management to respond with some ideas themselves. Now is an excellent time to evaluate Elliott's actions and see what it might bring for AT&T's investors.
The news
On the ninth of September, AT&T shot up before the open. This was because an activist shareholder had sent a letter to the board. The activist shareholder in question was Elliott Management, which is run by billionaire Paul Singer. Disclosed was that Elliott had acquired a $3.2 billion stake in the company and sees it as highly undervalued. According to the hedge fund, the stock could be trading at $60 in 2021. The same day AT&T responded and hired the bankers of Goldman Sachs (GS) to help navigate the unwanted involvement of Singer.
According to sources, Singer wants the current CEO and COO pushed out of the company. In response to all of this, the Wall Street Journal reported that AT&T is exploring a possible divestment of DirecTV. These developments can be significant to shareholders, so it's worth a dive. This is not because one might be a fan or an adversary of activist shareholders, but reading different opinions is key for your investments. Confirmation bias is a true danger for investors, so reading things that are perhaps not likable and contradict your thesis are highly valuable.
Elliott Management
The first thing to understand is that not all activist shareholders are equal. Elliott is certainly one of the most infamous hedge funds out there. Founded in 1977 with just $1.3 million, Elliott Management has since grown to $38.2 billion AUM. This spur has made its founder Paul Singer a multi-billionaire and a force to be reckoned with. The hedge fund has challenged states such as Argentina and Congo in court successfully and has taken stakes in corporate giants such as Alcoa (AA), NXP Semiconductors (NXPI), Bayer (OTCPK:BAYZF) and Pernod Ricard (OTCPK:PDRDF). By pressuring management for things such as divestments or asking for a higher price from an acquiring company, they hope to reap the rewards. The agenda they are now hoping to set at AT&T appears to come straight out of Elliott's playbook.
The Letter
For those who haven't read the letter, it can be found here. Since it is of little use to reproduce the entire letter here, I'll only zoom in on the interesting parts. Luckily, the proverbial feather-tickling at the start is short of length and Elliott comes straight to the point after it:
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. This represents 65%+ upside to today’s share price – a rare opportunity for any company, let alone one of the world’s largest. - Elliott's Letter
Considering that at the time of the publication AT&T was trading at the $35 mark, effectively opening with an ambitious target does the trick. But a per share value of over $60 in Q4 of 2021, is a long way removed from current pricing. In my earlier article, I saw upside, although at a much lower bar:
Given the current valuation and the progression of the balance sheet improvements, a further move towards the five-year high of over $43 seems only a matter of time.
Things get noteworthy again when Elliott analyzes the build-up to the current state of affairs at AT&T. First, the harm done by M&A:
