Crown Castle defends fiber strategy against Elliott

Crown Castle small cell vs tower (Crown Castle)
Crown Castle's CFO said Elliott’s recommendations would be “the exact opposite” of what Crown Castle has determined to be its best strategy in terms of fiber and small cells. (Crown Castle)

In July, activist investor Elliott Management launched an attack against Crown Castle International, claiming the tower company needs a makeover of its fiber strategy. And in a sign that Elliott may be swaying the Crown Castle board, yesterday Crown Castle announced that its Chief Operating Officer for Fiber James Young plans to retire following more than 14 years with the company. 

Young has agreed to remain with Crown Castle through February 2021 in order to assist with the search for and transition to his successor.

This week, Crown Castle’s Chief Financial Officer Dan Schlanger had the opportunity to defend Crown’s fiber business and to rebut Elliott’s recommendations.

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Speaking at the 6th Annual Cowen Communications Infrastructure Summit, Schlanger said Elliott’s recommendations would be “the exact opposite” of what Crown Castle has determined to be its best strategy in terms of fiber and small cells.

Elliott is recommending that Crown Castle target a 40% return on investment from Capex spent on fiber projects. But Crown Castle claims that would effectively destroy its fiber ambitions connected with small cells.

Schlanger said a primary driver of its fiber strategy is the future value of colocation builds on small cells. 

But, as is often the case with Elliott, the activist firm wants higher returns on a shorter time frame, and Crown’s plan has a longer-term horizon. Schlanger said a short-term 40% return would prevent the company from investing in new builds outside its existing footprint, and it would prevent Crown from investing in what it sees as a lucrative future in small cells.

“Schlanger again cited the tower industry as a point of comparison for the evolution of small cells, as it took a significant period of time before the tower companies were able to generate attractive incremental yields off their colocations,” wrote Cowen analyst Colby Synesael, who interviewed Schlanger earlier this week.

RELATED: Elliott blasts Crown Castle’s fiber strategy

Elliott owns an economic interest worth $1 billion of Crown Castle, and it is engaged in private conversations with Crown Castle management. The activist firm said it went public with its complaints and recommendations in order to “facilitate a broader discussion” and outline a plan that will remedy what it calls chronic underperformance.

Schlanger said the recommendation of getting to 40% return on any fiber capex would require more buildings be attached to the fiber the company already owns, and it would preclude its investment in fiber as it relates small cells. He anticipates good future value for colocation for small cells.

“Our strategy has been to invest in fiber that we believe would be good for small cells. Cutting off those investments now doesn’t make sense to us,” said Schlanger. We believe those small cells are coming and that there’s a tremendous opportunity to add value. But stopping now would cut off that opportunity. This is the right time to be pushing into this. We’re not going to avoid every project where we have to build anchor builds.”

New Street Research analyst Spencer Kurn noted recently, “Small cells will enhance the return profile of the fiber segment, and all of the companies we heard from during our recent ‘5G Infrastructure Transformation’ meeting series expect small cells growth to accelerate as 5G networks are deployed. We believe Elliot’s proposal could support a higher stock price for CCI in the near-term, but it would come at the expense of long-term growth.”

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