AT&T's Paul Singer Fight Echoes Undisclosed Activist Letter (Exclusive)

Elliott Management's pressure on the telecom to shake up leadership and sell assets (like DirecTV) is similar to a February effort by a secret shareholder.

In a Sept. 9 letter to AT&T's board that copied CEO Randall Stephenson, Paul Singer's Elliott Management sent a shot across the bow by suggesting that leadership changes would be welcomed by the activist investor. The 24-page letter was particularly critical of Stephenson's $109 billion takeover, including debt, of Time Warner.

While the move by Elliott, which also disclosed that it owns a $3.2 billion stake in the telecom-media giant, sent shock waves throughout the business world, it also echoed a recent effort from an undisclosed shareholder.

In a previously unreported letter to Stephenson and WarnerMedia CEO John Stankey dated Feb. 25, the unnamed person also criticized the wisdom of the Time Warner acquisition and took aim at managers, including then-Warner Bros. CEO Kevin Tsujihara and former HBO chief Richard Plepler.

The Hollywood Reporter obtained the nine-page document (the shareholder's name was redacted), which was sent by Vick Law Group in L.A. and demanded inspection of AT&T corporate records. Elliott management declined to comment on the letter, as did AT&T, which says it is aware of the identity of the shareholder. A source familiar with Elliott's strategy says the hedge fund is not the shareholder referenced.

What is curious about the February missive is that it foreshadowed the exits of Plepler and Tsujihara by just days. In the case of Tsujihara, the letter claimed without evidence that an unnamed actress negotiated a multipicture deal "to cover up possible transgressions by or involving Tsujihara" and called out Warners for "the highly questionable and rushed circumstances" behind its $290 million purchase of the RatPac-Dune film library. (Tsujihara's relationship with aspiring actress Charlotte Kirk was first revealed 10 days later by THR, which reported on the affair and subsequent push to secure parts for her that led to the CEO's exit.)

The shareholder also took umbrage at Plepler's move to greenlight the Michael Jackson doc Leaving Neverland, arguing that it opened the company up to a nine-figure lawsuit. (The Jackson estate sued HBO for $100 million days before the letter, and the case is making its way through the courts.) Plepler exited HBO on Feb. 28, three days after the missive.

The letters written by Elliott and attorney Scott Vick echoed each other in their rebuke of Stephenson (the latter letter also called out Stankey for his "hands off approach" on some of the decisions it dubbed foolish and detrimental to stakeholders).

In response to Elliott's campaign for change, AT&T CFO John Stephens told investors Sept. 11 that the board and management of the company "look forward to meeting with Elliott," which is one of Wall Street's largest and most aggressive activist investors. Elliott went so far as to purchase online ads linking to its letter, which also criticized AT&T's $67 billion purchase of DirecTV in 2015.

In hindsight, that deal looks outsized given how streaming video has progressed since then while the satellite TV service coupled with AT&T's U-verse has shed more than 2 million U.S. subscribers, despite launching the DirecTV Now skinny bundle in 2016 that's meant to compete with Netflix. Perhaps AT&T already recognizes the dipping cachet of DirecTV given that it has renamed that product AT&T TV Now.

Elliott, according to its letter, also is demanding that Stephenson "articulate a clear strategic rationale for why AT&T needs to own Time Warner," which it purchased in 2018. Elliott even quotes former Time Warner CEO Jeff Bewkes, who recently called the vertical integration of content and distribution a "fairly suspect premise."

While Elliott stops short of demanding specific entertainment spinoffs or outright sales, the investment firm clearly believes that such moves would juice the stock, which hasn't budged in two years. Beyond DirecTV, candidates for divestiture include the regional sports networks, Central European Media Enterprises, Sky Mexico, other Latin American pay TV operations and unidentified pieces of WarnerMedia.

Although Elliott's stake in AT&T represents less than 2 percent of the company, its activism puts Stephenson and Stankey, his heir apparent, on notice, observers say.

"There's a lot of potential upside from letting Elliot a bit further into the tent," says analyst Jimmy Schaeffler of The Carmel Group. "AT&T doesn't have to accept their contributions, but assuming Elliott got where it is by listening to some smart people, the upside vs. the downside for AT&T is considerable."

Schaeffler suggests that AT&T starts off small by taking a short meeting with Elliott where it is allowed to present two pages of suggestions and a few slides. "That would be the testing ground. If that part of the risk paid off, and AT&T management likes what Elliott presents, then ask for more."

But Fitch analyst John Culver warns that Elliott's demands could become a "major distraction for management" as it is suggesting that AT&T divest itself of assets the telecom giant deems core, including DirecTV.

"Elliott is legit and swings a big stick," adds analyst Steven Birenberg of Northlake Capital Management. "Elliott seems to be saying the purchases of DirecTV and Time Warner were bad decisions, especially DirecTV. They are correct."

Birenberg sees DirecTV as a "failed acquisition" with the only way out to merge it with Dish Network, a plan that would attract regulatory scrutiny. Plus, "satellite is in trouble and in any form is going to get a depressed valuation."

This story first appears in the Sept. 18 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.