Cox: AT&T opens itself up to activist attack
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
AT&T’s $85 billion takeover of Time Warner looks like a deal from another era. Back around the turn of the millennium, corporate chieftains roamed the global capital markets freely, buying rivals at random and running roughshod over shareholders, unencumbered by vigilant boards or uppity investors.
In this profligate epoch, the Hollywood studio was a popular plaything. Think Edgar Bronfman, who skunked his family’s Canadian booze kingdom by acquiring MCA, owner of Universal Studios, before handing it over to Jean-Marie Messier, who set out to use it to transform a boring French utility into a cutting-edge media conglomerate.
In 2000, Vivendi acquired Universal from the Bronfmans for $34 billion to, in his words, “make the internet swing.” And swing it did, just not the way Messier – or J6M, for “Jean-Marie Messier, Moi-Même Maître du Monde” (master of the world) – had anticipated. Crushed by losses two years later, Messier was out and Vivendi’s Tinseltown dreams diminished with the disposal of Universal to General Electric.
It’s a sordid tale AT&T Chief Executive Randall Stephenson might reflect upon as he illogically deploys shareholder booty to acquire the creative minds behind HBO’s “Game of Thrones,” Looney Tunes cartoons and Harry Potter films. The deal he intends to ram down the gullets of AT&T owners is financially wasteful, industrially nebulous, politically inadvisable and, quite possibly, legally unfeasible. There is, however, a blueprint to try and stop him.
The consensus on Wall Street is that Stephenson had to do “something.” After all, Ma Bell is running out of steam, what with every American man, woman and child already staring into the glow of a connected device of some kind. Estimates compiled by Eikon forecast AT&T’s top line will grow by less than 5 percent, to $172 billion, from this year to the end of 2019.
What AT&T’s dividend-loving shareholders did not anticipate, however, was that Stephenson – arguably corporate America’s most compulsive shopper – would splurge on a refreshed convergence theory. Since word of the Time Warner deal first leaked about a week ago, AT&T has shed $17 billion of market value. That covers most of the premium it is handing over for control of the company.
In most sensible acquisitions, a buyer promises to reduce expenses in the combination, diluting the financial impact to its owners. AT&T does say it will target $1 billion in savings, but given the absence of overlap, it’s a dubious pledge. “Most of these,” posits Cowen analyst Colby Synesael of the synergies, “will come from what will likely be meaningful headcount cuts within AT&T that were likely to occur regardless of whether AT&T was acquiring Time Warner.”
Then there is the strategic rationale. It flies in the face of the enterprise sagely deconstructed by Time Warner boss Jeff Bewkes. He jettisoned the company’s cable, publishing and ancillary internet operations to focus on producing television shows and movies. That strategy, as it happens, also is the one adopted by rivals Twenty-First Century Fox and Walt Disney, both of which traditionally garner higher valuation marks from investors.
Meantime, politicians have railed at AT&T’s plan, presaging a more difficult trip through the antitrust and telecom authorities. Add it all up, and it’s easy to sympathize with the market’s judgment. Time Warner shares today trade at a 20 percent discount to the value of the offer, half of which comes in AT&T shares.
None of this is entirely surprising given Stephenson’s proclivity for acquisitions. Four years ago, AT&T’s board merely slapped him on the wrist for a botched $39 billion bid to buy T-Mobile, which was skewered by antitrust regulators and cost AT&T’s owners $4 billion in break fees. Those helped its would-be quarry engage in a damaging mobile-telephony price war.
Stephenson then gazed across the ocean at British titan Vodafone. After running the numbers, AT&T demurred, but only briefly. AT&T saw something shinier at home: satellite operator DirecTV, which it acquired for $67 billion last year. At the very least, these purchases were adjacent bets on AT&T’s core of connectivity and distribution.
What can embittered AT&T shareholders do? They don’t get to vote on the Time Warner deal, thanks to the crafty workings of Stephenson and the board. Beyond a rival bid that rescues them or regulators squashing the plan, investors determined to put a stop to the madness could enlist the services of a modern-day white knight of sorts: an activist.
There is precedent. Carl Icahn was shaving one morning when he heard that drugmaker Mylan Laboratories was pursuing a value-crushing takeover of King Pharmaceuticals back in 2004. The buyer’s shares dropped 16 percent. “I wondered: ‘What did this management just do?’” the voluble billionaire told Fortune magazine at the time. He piled into the stock, grabbing nearly 10 percent of it, and mounted a successful campaign to torpedo the deal.
That was back when activists targeted smaller companies. A decade on, they have rattled the cages at Microsoft, Apple, Procter & Gamble, PepsiCo and General Electric. Why not AT&T? Stephenson’s empire-expanding ways make the $220 billion company an easy target. There’s already ample lost value to reclaim. If AT&T can slash $1 billion of costs as a smokescreen for a lousy deal, a more competent operator probably could find even more. AT&T’s annualized total shareholder return has lagged Verizon’s over the last decade. Its rival is also better at squeezing more from each dollar of revenue, with a 20 percent operating margin so far this year that exceeds AT&T’s by 4 percentage points.
Frustrated fund managers these days send out the proverbial Bat-Signal in what is colloquially referred to as an “RFA”, or request for activist. Before these AT&T investors wind up overpaying for the company behind Batman himself, they should send out the distress call.