In a letter to AT&T’s board of directors, Elliott Management said it believes the stock’s underperformance relative to the S&P 500 SPX,
+ 0.02%
over the past decade has left the company “deeply undervalued”.

Elliott said it was a four-part value creation plan – Activation of the AT&T plan – could create an opportunity to push the stock price above $ 60 by the end of 2021, which would lift the stock above the July 16, 1999 record close of $ 59.19 . That would represent a gain of over 65.5% from Friday’s closing price of $ 36.25.

Elliott revealed in the letter that he owns a $ 3.2 billion stake in AT&T, which he appears to have acquired in the past three months. In Elliott’s Last 13F filing with the Securities and Exchange Commission of its holdings in equities, the hedge fund founded by billionaire Paul Singer, the fund held no AT&T shares as of June 30.

Elliott’s four-part plan includes improved strategic direction, significant operational improvements, a formal capital allocation framework, and improved leadership and oversight.

The first thing AT&T needs to do is move its strategy from acquisition to execution, Elliott said, and start by doing a review of its portfolio to see what it should prioritize and what activities it should divest. .

Some of the assets, according to Elliott, that are not core and should be sold or separated include DirecTV, Mexican wireless operations, part of its wired footprint and “much, much more.”

Elliott also recommended more aggressive cost cutting and identified more than $ 10 billion in “opportunities” to save. And for capital allocation, Elliott said AT&T should continue to aggressively repay debt, remain committed to raising the dividend and should systematically buy back its shares, especially since valuations are currently at their lowest since the crisis. financial.

During the second quarter ended June 30, AT&T spent approximately $ 71.8 million to repurchase 2.2 million shares, after spending $ 208.2 million to repurchase approximately 6.8 million shares in during the first trimester.

Elliott pointed out that AT & T’s dividend yield, currently at 5.52%, presents a “particularly attractive opportunity,” given its spread above the VZ of Verizon Communications Inc.,
-0.09%
current dividend yield of 4.19% and higher than the yield of the 10-year Treasury bill TMUBMUSD10Y,
1.541%
by 1.62%.

Separately, Elliott pointed out that Verizon has aggressively cut costs, including downsizing, while AT & T’s organization is needlessly complicated and inefficient. For example, recent annual reports show that Verizon’s workforce fell to 144,500 at the end of 2018, from 155,400 at the end of 2017, while the number of AT&T employees grew from 252,000 to 268. 000 during the same period.

AT&T stock has gained 13.6% in the past 12 months, while Verizon shares are up 8.4% and the S&P 500 has soared to 3.5%. Over the past decade, AT&T shares have risen 42%, while Verizon more than doubled (up 103%) and the S&P 500 nearly tripled (up 188%).

Regarding leadership building, Elliott said he has identified several top candidates who could help as qualified directors, which he would like to discuss with the board.

AT&T responded by saying it would review Elliott’s outlook. “Indeed, many of the actions described are those we are already taking today,” AT&T said in a statement.

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See linked: WarnerMedia offers buyouts to Turner employees as AT&T reshapes its business.

Citigroup analyst Michael Rollins reiterated his buy rating while raising his price target for AT&T stock to $ 42 from $ 37, but said this was independent of Elliott’s activism efforts. He said his increased focus was a result of the opportunities AT&T has to reduce debt, improve operating segments, further monetize non-core assets and improve returns for shareholders.

Wells Fargo analyst Jennifer Fritzsche stuck to her focus on market performance, saying Elliott’s letter shines a light on parts of AT&T history that resulted in a compelling stock valuation. “However, we believe that many of the suggestions that it (beyond the change of direction)[AT&Tpoursuitdéjà”aécritFritzschedansunenoteauxclients”Undomainedanslequelnousavonsétéquelquepeusurprisquelalettren’aitpasabordélanécessitéderésoudreleproblèmeduhautdébit”[AT&Tisalreadypursuing”Fritzschewroteinanotetoclients”Oneareaweweresomewhatsurprisedtheletterdidn’tdigintowastheneedtofixthebroadbandissue”[AT&Tpoursuitdéjà”aécritFritzschedansunenoteauxclients« Undomainedanslequelnousavonsétéquelquepeusurprisquelalettren’aitpasabordélanécessitéderésoudreleproblèmeduhautdébit »[AT&Tisalreadypursuing”Fritzschewroteinanotetoclients“Oneareaweweresomewhatsurprisedtheletterdidn’tdigintowastheneedtofixthebroadbandissue”

Regarding the AT & T story that hurt the stock, Elliott laid out AT & T’s “questionable” merger and acquisition strategy, in which it spent nearly $ 200 billion over the course of the last decade of acquisitions that have shifted the business focus from a pure-play telecommunications company with a leading franchise to a “sprawling set of companies” in new markets with different regulations and strong competitors funded.

Although nearly 600 days have passed since AT&T closed its $ 109 billion buyout of Time Warner, initially announced in 2016, the company has yet to make it clear why it needs to own the media giant. “We think that after $ 109 billion and three years, we should now see some manifestation of clear strategic advantages,” Elliott wrote.

Do not miss: DirecTV is good for AT & T’s wireless business, bad for TV.

Although AT&T said pay TV was a “very good sustainable business” when the company announced the $ 67 billion acquisition of DirecTV announced in 2014, Elliott said the pay TV ecosystem was undergoing a downturn. tremendous pressure since the deal was signed. “In fact, trends continue to erode, with AT & T’s premium TV subscribers declining rapidly as the industry, especially satellite, fights hard,” the letter said. “Unfortunately, it has become clear that AT&T has acquired DirecTV at the absolute pinnacle of the linear television market.”

Perhaps the most damaging deal was the $ 39 billion deal to buy T-Mobile announced in 2011, which was not reached due to regulatory pressure. “Unfortunately for AT&T and the industry, AT&T paid the highest breakout fees ever and provided T-Mobile with a seven-year roaming deal and the invaluable spectrum it needed to move from a competitor then in difficulty with the flourishing force that it is today “, indicates the letter.” In addition to the internal and external distractions which it caused to itself, the failure of the takeover of AT & T capitalized a competitor viable for years to come. “