Elliott Management didn't mention the name John Stankey in its letter last week to AT&T's board, but the activist hedge fund was clearly expressing its concern about the WarnerMedia CEO's decision-making, especially as he assumes a bigger role at the telecom giant.
Stankey's positioning as the next CEO of AT&T was the catalyst for Elliott's Jesse Cohn, a partner at the firm, and Marc Steinberg, an associate portfolio manager, to take a $3.2 billion stake in AT&T and disclose a plan for "enhancing leadership" at the company. The investors don't like Stankey and ideally want him out, along with AT&T CEO Randall Stephenson, according to people familiar with the matter who asked not to be named because the details are confidential.
Stephenson said Tuesday at the Goldman Sachs Communacopia Conference in New York that Stankey was "in a pretty good position" to take over as AT&T's next CEO "if he executes the play." Elliott has several candidates in mind to replace both executives, the people said.
"The play" is AT&T's integration and the systematic dismantling of decades-old walls at Time Warner. Stankey is no longer content with HBO working separately from his other cable networks, which then operate independently from Warner Bros. He's rejiggered operational groups and leadership to get all three silos — HBO, the cable assets and Warner Bros. — teaming up on a new streaming product, called HBO Max. He's spending billions on hit shows from previous decades, including "Friends" and "The Big Bang Theory," to stream exclusively on HBO Max. He's banking his future on the success of the offering, which he hopes to get in the hands of 70 million to 80 million customers in the coming years. HBO Max will go to market in 2020 for a subscription price that CNBC has reported will be between $15 and $18.
"It's a hard play," Stephenson said at the Goldman conference. "John has broken down the silos fairly quickly, which is not easy to do, and getting the business reoriented toward HBO Max."
And "the play" is also why Elliott's distrust of Stankey is actually an interesting existential business question with no clear answer. Does it make sense to remove a leader with a questionable track record when he's only partially through with its execution?
Even for an investor as seasoned in conflict as Elliott and its founder Paul Singer, taking on AT&T, with a market cap of over $270 billion, is a tall task. Elliott says it won't accept incremental solutions, like small divestitures, people familiar with the matter told CNBC. AT&T has already begun engaging with Elliott on ideas, the people said.
Cohn and Steinberg said in the letter that they've interviewed hundreds of "former executives, competitors and partners" who have questioned AT&T's leadership. The hedge fund hasn't directly called for the ouster of Stephenson and Stankey. It's unclear if Elliott will settle with AT&T's board of directors without the removal of one or both. Elliott declined to comment on its negotiation strategy or what it's asking from AT&T. The Wall Street Journal reported last week, citing sources familiar with the matter, that AT&T will resist any attempts by Elliott to dictate who sits in its executive suite.
The problem Elliott faces in considering such a dramatic reshuffle is that Stankey's perceived missteps, mostly pertaining to his handling of big acquisitions, can't be undone by getting rid of him. Stankey, who was elevated to chief operating officer of AT&T earlier this month making him Stephenson's No. 2, is in the midst of integrating the company's $104 billion purchase of Time Warner. Bailing on him at such a critical juncture could throw a struggling company into utter chaos.
Whether Elliott has a concrete plan for WarnerMedia without Stankey is unclear, but the firm does have a legitimate case for criticism.
AT&T tried to buy T-Mobile in 2011 before regulators blocked the deal. The breakup fee included a seven-year roaming deal for T-Mobile and billions of dollars in wireless spectrum that the carrier has since used to nab millions of customers from AT&T and Verizon.
Four years later, AT&T bought DirecTV, a disastrous deal that led to a sharp drop in customers at the satellite service and the online bundle DirectTV Now (renamed AT&T Now). Elliott points out that virtually every person running DirecTV in 2015, when AT&T closed the $67 billion acquisition, has left the company.
"It has become clear that AT&T acquired DirecTV at the absolute peak of the linear TV market," the letter said.
Stankey refuses to view the deal as a failure because of the savings AT&T U-Verse received after applying DirecTV's lower carriage rates on programming, according to a person familiar with the matter. But those savings can't match the loss in market value. Craig Moffett, a telecommunications analyst at MoffettNathanson, estimates DirecTV is now worth less than $25 billion.
On top of those strategic misfires, big-name executives such as former Time Warner CEO Jeff Bewkes and ex-HBO chief Richard Plepler have departed on Stankey's watch.
With that sort of track record, from Elliott's perspective, AT&T should find another leader to oversee such valuable assets as HBO and Warner Bros., cable channels TBS, TNT and CNN, and digital properties including Otter Media and Bleacher Report.
An AT&T spokeswoman declined to comment.
In defense of Stankey, his view on Time Warner is a company that's done well in the past doesn't necessarily mean it will continue to flourish if it follows an out-of-date playbook.
He's trying to follow the market's momentum, reorganizing the company for the streaming era and away from linear cable. Netflix trades at a trailing price-to-earnings ratio of 115, almost eight times higher than AT&T at 15.
"The content creation business is changing, and it's not changing by a little," Stephenson said at Tuesday's conference. "All of the growth is happening digitally. So if you're a content creation company and you're making content to distribute in the old world — cable, satellite, even movie theaters — that's probably not a very rosy picture for a content creation company. But if you're a content creation company and you have a direct line of sight and a direct path to a large group of consumers, then you have a unique competitive advantage. And that's the play we're running here."
Elliott clearly disapproves of AT&T's leadership. It already sees problems with the company's streaming efforts, which have caused market confusion because of the multitude of products it's putting on the market and an already rejected plan to have multitiered over-the-top options.
But it's hard to see AT&T bailing on Stankey before he gets a chance to execute "the play," even if he's a head coach with a spotty record.