Activist investor Elliott Management, the same firm that trashed AT&T’s management last year, says Crown Castle International is in need of a makeover, most notably in its fiber strategy.
Elliott, which owns an economic interest worth $1 billion of Crown Castle, on Monday released a letter and presentation outlining a way forward. The firm said it’s been engaged in private conversations with Crown Castle management for the past month and it went public in order to “facilitate a broader discussion” to outline a plan that will remedy what it calls chronic underperformance.
Elliott recommends a “Reclaiming The Crown Plan,” a series of initiatives (PDF) to improve Crown Castle's performance and better align corporate governance and management incentives with shareholders. Included in the plan is a recommendation to add greater diversity to the company’s board, noting that eight of the 11 non-executive directors have at least 13 years of tenure.
While it likes the tower business, Elliott asserts that Crown Castle has underperformed compared with its peers, American Tower and SBA Communications, on a persistent basis for more than a decade. The underperformance is especially disappointing because, according to Elliott, Crown’s U.S. tower portfolio has more attractive characteristics than its peers and is better prepared for the 5G upgrade cycle.
Crown Castle’s portfolio includes more than 40,000 towers and about 80,000 route miles of fiber concentrated in the top 100 U.S. markets. It also has invested $16 billion in a fiber strategy that Elliott says has detracted from shareholder returns and will continue to do so unless changes are made.
“While we admire Crown Castle's investments in the wireless tower industry, we believe that the Company's expansion away from its core and into fiber infrastructure has detracted from shareholder returns and will continue to detract from shareholder returns unless significant changes are made,” Elliott wrote in the letter. “Fiber infrastructure businesses can be attractive investments, but it is our considered view that Crown Castle's fiber strategy has not been successful and that the return on these investments has significantly underperformed.”
Given Elliott’s dim view of Crown’s fiber business, one might expect a sale would be among its recommendations, but it’s not going there. Instead, Elliott suggests that an outright sale would be disruptive and more costly than the value created, especially in the current market environment. “In addition, while we are critical of Crown Castle's investment approach, we believe fiber infrastructure is an attractive asset class and, if operated properly, can compound strong investment returns,” Elliott wrote.
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In response to the letter, Crown Castle issued a statement chronicling how it’s generated value for shareholders over the years. It acknowledged that members of the board and management team have met with Elliott multiple times to understand and evaluate their assumptions and proposed changes.
“While we firmly believe our strategy best positions
Small cells & fiber
Crown Castle admits to investors that small cell projects require a second or third tenant for attractive investment returns, according to Elliott. But that outcome is not assured, and Elliott points to statements from Verizon and AT&T executives about how they prefer to use their own fiber whenever possible.
In a report for investors on Monday, New Street Research analyst Spencer Kurn noted that Elliott’s recommendation to target 40% ROI projects in the fiber business would effectively curtail Crown’s investments in small cells.
“Similar to Elliot, we have been unenthused by the returns that CCI has generated in its fiber segment; however, we saw the returns in fiber as the problem. 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,” Kurn wrote. “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.”
He added that there may be room for Crown Castle to shift strategy to improve fiber segment returns, “but given the outlook for small cells growth and the sunk costs of the fiber CCI has already acquired, we don’t believe CCI should abandon their small cells business.”
Wells Fargo Securities analysts said they understand many of Elliott’s suggestions, but they continue to see the value of Crown’s fiber strategy.
“In our view, the main spender of small cells has been VZ. We believe with the new TMUS and greater urgency from T – there will be a greater lease up of these assets,” wrote Well Fargo’s Jennifer Fritzsche. “While we also understand the high capex concerns – pushing out a critical mass of this fiber laterals we see as a good thing – as it is getting ahead of the demand, which all checks indicate is coming. As the largest owner of US marco sites – we believe CCI is well equipped to leverage both macros and small cells as important tools in the 5G ecosystem tool box.”
Interestingly, Elliott’s materials referenced a quote by Raymond James analyst Rice Prentiss, who wrote in a March report that U.S. towers would be the BBE (Best Business Ever) and should command a premium compared to small cell/fiber systems or international towers.
The Raymond James report later clarified that the U.S. macro towers are the “Best Business we have Ever seen,” and while tower stocks are not immune to major market disruptions, the public tower company management teams have learned valuable lessons over the years. Tower stocks were hit extremely hard when the tech bubble burst in 2001/2002, and some tower companies like SpectraSite went bankrupt.