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Will AT&T keep DirecTV? Pay-TV unit lost 1.2 million customers in third quarter

EL SEGUNDO-CA-SEPTEMBER 5, 2017: AT&T offices in El Segundo. (Christina House / For the Times)
AT&T offices in El Segundo in 2017.
(Christina House / For The Times)

AT&T has reached a truce with an activist investor critical of its strategy, but the company’s DirecTV unit continues to bleed customers, raising questions about AT&T’s long-term commitment to the satellite TV business.

The Dallas telecommunications company said Monday its DirecTV and its U-Verse television business in the third quarter lost a staggering 1.2 million customers, as more consumers cut the cord and migrate to video streaming platforms.

Even AT&T’s streaming service, AT&T TV Now, shed nearly 200,000 customers in the quarter, underscoring the company’s struggles to retain pay-TV customers.

The subscriber losses continue a troubling trend that had attracted the scrutiny of an activist investor, Elliott Management Corp., which prodded AT&T to sell assets, including the El Segundo-based television giant.

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DirecTV’s business has stumbled since AT&T acquired it in 2015. During a conference call Monday with analysts to discuss its three-year business plan, AT&T Chairman and Chief Executive Randall Stephenson suggested that AT&T may eventually shed DirecTV.

“We have no sacred cows,” Stephenson said, adding that DirecTV “will be an important piece of our strategy of the next three years. But no portion of our business is ever exempt from a continuous assessment for fit and performance. “

Stephenson said the company would “evaluate multiple options and partnerships” for DirecTV.

The truce removes a potential distraction for AT&T at a crucial time.

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AT&T has been under pressure from the New York hedge fund since early September when Elliott Management fired its salvo, a 23-page critique of AT&T management and operations.

Potentially spinning off DirecTV was one of the concessions won by Elliott Management during seven weeks of negotiations. The two sides met several times at AT&T’s Dallas headquarters and engaged in frequent phone conversations to hammer out a business plan that would be acceptable to both, according to people close to the process who were not authorized to speak publicly.

Elliott Management is headed by billionaire Paul Singer and owns a $3.2-billion stake in AT&T. The firm rebuked AT&T’s decision to spend more than $150 billion to become an entertainment colossus by purchasing DirecTV and then Time Warner, which includes HBO, CNN and the Warner Bros. television and movie studio in Burbank. AT&T renamed the entertainment company WarnerMedia.

Elliott Management has demanded that AT&T strengthen its board and management team, as well as shed underperforming assets. On Sunday, AT&T announced that it would sell its stake in Central European Media Enterprises to a Czech investment firm for about $1.1 billion and a relief of a $575-million debt guarantee. Earlier this month, AT&T said it would sell its phone operations in Puerto Rico and the U.S. Virgin Islands to Liberty Latin America.

“We commend AT&T for the positive steps announced today,” Elliott Partner Jesse Cohn and Associate Portfolio Manager Marc Steinberg said in a statement Monday. “It is clear to us that AT&T is committed to and accountable for creating shareholder value over the near and long term.”

As part of the agreement with Elliott Management, AT&T pledged not to make any more major acquisitions. AT&T agreed to add two new board members by 2021, including tapping someone with experience in media.

AT&T also said it would purchase about $30 billion in stock buy-backs to boost the value of the holdings of investors. Elliott Management is expected to continue to have input in AT&T’s strategy.

In addition, the hedge fund pushed for Stephenson to outline a succession plan. On Monday, Stephenson said that he was planning to serve through the end of next year to help transform the phone company into an entertainment behemoth.

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“I have every intention to be here,” said Stephenson, 59.

AT&T is expected to launch a search for a new chief executive sometime next year. John Stankey, the current CEO of WarnerMedia, is a candidate to succeed him.

AT&T also agreed to separate its chairman and chief executive roles, a departure for the company, whose leader has long held both titles.

Elliott Management also has pushed for new leadership at WarnerMedia.

Stankey, a 34-year phone executive and Stephenson’s top deputy, has been leading the entertainment company since 2018, when AT&T purchased it for $85 billion. Stankey has been wearing two hats for the last two months. In early September, he became chief operating officer of AT&T while continuing to manage WarnerMedia.

People close to the situation said they expect a new chief executive at WarnerMedia to be named soon. Potential inside candidates include Jeff Zucker, the president of CNN who previously ran NBCUniversal for four years; and Ann Sarnoff, the former head of BBC Studios Americas who was recently installed chief executive of Warner Bros.

Stephenson sidestepped an analyst’s question about the timetable for Stankey to relinquish day-to-day control of WarnerMedia.

“I have no doubt [Stankey] will find the right person for that job,” Stephenson said, noting that WarnerMedia still will be part of Stankey’s purview because he is COO of the entire company.

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The changes could be telegraphed at an investor day at Warner Bros. in Burbank on Tuesday to showcase its HBO Max streaming service.

AT&T is betting heavily on the streaming service, which will have exclusive access to HBO titles and shows from Warner Bros., including “Friends” and “The Big Bang Theory.” It also will be stocked with movies from Warner Bros.’ deep library.

Analysts welcomed the outcome on a day when the company missed analyst’s estimates for subscriber growth and revenue.

AT&T posted a profit of $3.7 billion for its latest quarter, a 22% decline from a year earlier. Revenue dipped 2.5% to $44.6 billion.

“The impact of Elliott Management has clearly been bigger than we initially expected and appears also to be driving greater board oversight/CEO succession plan accountability,” Colby Synesael, a telecommunications analyst with Cowen & Co., wrote Monday in a research note.

AT&T stock climbed 4.28% on Monday to $38.49, reaching a 52-week high.


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