An activist investor’s attempt to force a strategy revamp at AT&T Inc. T 1.49% spotlights the diverging paths the two largest U.S. wireless carriers have taken in search of growth.
Elliott Management Corp.’s detailed criticism Monday of decisions made by AT&T’s leaders effectively praises rival Verizon Communications Inc. ’s focus on upgrading its wireless network over becoming a media giant.
While AT&T has spent heavily on entertainment and advertising assets, Verizon has put building a faster 5G network at the center of its strategy. Investors have rewarded Verizon with a similar market valuation, even though AT&T has nearly 30% more annual revenue.
Displacing Verizon is a “potential reset of incredible importance,” Elliott wrote to AT&T’s board, arguing that the Dallas-based company’s wireless business isn’t just losing market share but is also becoming less profitable.
AT&T and Verizon have long been the two largest wireless providers in the U.S. by subscribers, but each has taken a different approach to generating new revenue in a wireless market. Technology giants and startups made billions on the back of the wireless connections that the carriers provided, leading each to seek ways to capture more of that spending.
Baby Bells Revisited
AT&T and Verizon have pursued two different strategies as they moved beyond the traditional phone business. Verizon doubled down on wireless, while AT&T pushed into media.
Market cap
$269B
AT&T
244
Verizon
Wireless revenue as a
percentage of total revenue*
42%
70
Total shareholder returns
over past five years
36%
49
Net debt to EBITDA ratio†
3.4 times
2.7
Employees
258,000
135,900
*As of end of 2018 †Last 12 months June 30, 2019
Sources: FactSet (market cap shareholder returns); the companies (revenue, employees);
“AT&T to a certain extent diversified away from the wireless business, despite the fact that the wireless business has been very good over the last few years, whereas the pay-TV and the traditional media business has been under more pressure than expected,” said John Hodulik, an analyst at UBS Group AG.
Many of the suggestions the activist made are already being implemented or are under discussion at AT&T, he said. Entering this week, AT&T has posted a total shareholder return—or stock-price changes plus dividends—of roughly 20% over the past year, compared with 14% for Verizon.
AT&T spent $49 billion to buy satellite-TV provider DirecTV and another $81 billion on Time Warner Inc., aiming to control content as well as connectivity. But cord-cutting has sapped customers from the pay-TV industry, prompting AT&T and others to launch streaming services.
On Monday, AT&T defended its current strategy and “the unique portfolio of valuable assets” it has assembled. “We look forward to engaging with Elliott,” AT&T said. “Indeed, many of the actions outlined are ones we are already executing today.”
Verizon spent $130 billion in 2014 to take full control of its wireless business but avoided a blockbuster media deal. It paid about $9 billion to buy AOL in 2015 and Yahoo two years later, but struggled to generate revenue and took a hefty charge to write down its internet business. Now, it focuses on partnering with content providers like YouTube TV.
Hans Vestberg, who became Verizon’s chief executive last year, restructured the company’s business lines and has made wireless connectivity and finding new applications for 5G technology top priorities.
Verizon is also in the process of cutting $10 billion in costs, a plan that has included a large voluntary severance program as well as outsourcing efforts. A Verizon spokesman declined to comment.
Elliott called on AT&T to follow suit and cut more costs from its operations. “While revenue per employee was nearly identical at both companies just over a decade ago (~$400k), today Verizon’s revenue per employee (~$900k) is nearly 30% higher than AT&T’s (~$700k),” Elliot wrote.
Elliott told AT&T’s leaders that the next generation of wireless service presented an opportunity for the carrier to reclaim wireless market leadership. AT&T should gain, Elliott said, from its spectrum holdings as well as benefits associated with being the provider of the federally backed FirstNet communications system for emergency responders.
Write to Sarah Krouse at sarah.krouse@wsj.com
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https://www.wsj.com/articles/activist-wants-at-t-to-be-more-like-verizon-11568112635
2019-09-10 11:51:00Z
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