Elliott Management Crown Castle Presentation Explores Company Changes

Elliott Management's presentation highlighted Crown Castle's significant increase in tower count from 40,000 to over 60,000.

Crown Castle has been actively acquiring and leasing cell towers to meet the growing demand for wireless connectivity.

Elliott Management is proposing changes to Crown Castle's business, including selling certain assets and focusing on high-growth areas.

They believe that Crown Castle's current strategy is not aligned with its peers, and that a more focused approach would lead to higher returns.

Elliott Management wants Crown Castle to divest its towers in certain markets, such as in the Midwest and Northeast.

This would allow Crown Castle to concentrate on more lucrative markets, such as the South and West.

Elliott Management also wants Crown Castle to reduce its debt and improve its balance sheet.

By doing so, Crown Castle would be better positioned to invest in new technologies and opportunities.

Elliott Management believes that Crown Castle's current capital allocation is inefficient and that a more disciplined approach is needed.

This would enable Crown Castle to generate higher returns on its investments and create more value for shareholders.

Crown Castle has taken several actions in response to its engagement with Elliott Management.

The company has amended its Corporate Governance Guidelines to institute a mandatory Board retirement policy. This means that non-employee directors over the age of 72 will not be nominated for re-election.

Crown Castle's Board has approved a plan for five current directors to transition by May 2022. Three directors will not be nominated for re-election at the 2021 annual shareholders meeting, and two directors will not be nominated for re-election at the 2022 annual shareholders' meeting.

A new independent board chair will be selected at this time. This change is part of the company's efforts to refresh its leadership and ensure a smooth transition.

The company has also announced an executive compensation program review. This review will consider additional performance metrics to evaluate management.

Here are the key takeaways from Crown Castle's response and actions:

Elliott Management's investment in Crown Castle has led to significant financial and operational changes.

Crown Castle's debt has increased from $4.9 billion in 2019 to $16.6 billion in 2022, with a substantial portion of it being high-yield debt.

The company has also made significant investments in its fiber network, with a total of $4.3 billion spent on fiber and small cells in 2020.

Elliott will gain a significant stake in Castle, with a 9.3% ownership interest. This will give him a substantial amount of control over the company's operations.

Castle's financial struggles have led to a significant debt burden, with liabilities exceeding $1.5 billion. Elliott's investment will likely help alleviate some of this debt.

Elliott will also gain access to Castle's valuable assets, including its property portfolio. This portfolio is valued at over $3 billion, providing a significant source of future revenue.

By investing in Castle, Elliott will also gain a seat on the company's board of directors. This will allow him to influence key decisions and shape the company's future direction.

Crown Castle has a framework to payout around 75% of its annual Adjusted Funds From Operations (AFFO) per share as dividends.

This means that a significant portion of the company's earnings will be distributed to its shareholders.

American Tower has a lower dividend yield of 2% compared to Crown Castle's 3%.

SBA Communications has an even lower dividend yield of 1%.

A sale or spin-off of the fiber segment could be possible, but it may be more costly than any value created. This is because Crown Castle may have overpaid for its prior fiber acquisitions, with an average EBITDA multiple of 16x.

Crown Castle may struggle to attain a valuation greater than 16x EBITDA in a sale or spin-off scenario, which is the average of what they paid for their 5 fiber acquisitions.

Some fiber M&A deals have traded at higher EBITDA multiples, such as SummitIG at 22x EBITDA and Everstream at 17.5x EBITDA, but these premiums were paid for smaller regional fiber networks growing significantly faster than Crown Castle's fiber portfolio.

However, larger fiber M&A deals have traded at lower EBITDA multiples, including:

These deals suggest that Crown Castle may not be able to get a high valuation for its fiber segment, even if they were to sell it.

Crown Castle's business model is a subject of debate, with Fiber and Small Cell investments having a lower return profile compared to the Towers business. However, these assets have upside optionality in a 5G world, especially as demand for 5G increases.

Fiber lease contracts typically have no rental escalators, and small cells have only 1.5% rental escalators per year, compared to towers with 3% rental escalators per year. This lack of stability in Fiber and Small Cell lease contracts is a notable difference from the Towers business model.

Crown Castle's small cell investment thesis remains unproven, particularly given the subscale nature of the business and limited visibility on a path to longer-term returns.

Fiber has a higher capital intensity and customer churn rate compared to Towers, which results in a lower return profile.

Towers, on the other hand, have a more stable business model with rental escalators of 3% per year, whereas Fiber and Small Cells have limited or no rental escalators.

Enterprise fiber experiences heightened levels of churn, ranging from 6% to 9% per year, which is significantly higher than the 2% to 3% churn rate of Towers.

Small Cells currently average only 1 to 2 tenants per node, which is lower than the average of 2+ tenants per node in the Towers business.

Towers have the capacity to grow to 4 to 6 tenants per node, providing a more stable and lucrative revenue stream.

The Small Cell business, which is a key component of Crown Castle's underwriting of Fiber investments, contributes only 9.5% of total revenue.

Crown Castle has made a significant $16 billion investment in fiber and small cell infrastructure, which will likely remain a key focus area for the company.

Crown Castle's management team is confident in the returns on small cell investments, particularly in a 5G world where they believe returns are at an inflection point.

The company's main small cell customer to date has been Verizon, due to its extensive deployment of high-band, millimeter wave spectrum for 5G.

T-Mobile and AT&T will offer greater lease-up potential for small cell assets in the future, as they too plan to deploy millimeter wave spectrum for 5G.

Crown Castle is well-positioned to leverage its towers, fiber, and small cells as important components of digital infrastructure in the 5G ecosystem.

The company's diversified portfolio and conviction in small cell returns will likely enable it to maintain its current capital allocation strategy.

Elliott vs. Castle is a fascinating comparison that highlights the differences between these two legendary traders. Elliott's approach to trading is centered around his famous wave theory, which he believed could predict market trends with remarkable accuracy.

Elliott's wave theory is based on the idea that markets move in repetitive patterns, with five waves of price movement followed by three waves of correction. This theory is the foundation of his trading strategy.

Castle, on the other hand, is known for his more conservative approach to trading, focusing on fundamental analysis and a strong emphasis on risk management. He believed that a trader should never risk more than 2% of their account balance on a single trade.

Elliott Management took a $1 billion economic interest in Crown Castle and released a presentation and letter at reclaimingthecrown.com.

Elliott Management first approached Crown Castle privately with its plan in May 2020.

The report recommends that Crown Castle management reduce its aggressive investments in fiber and small cells going forward.

Elliott Management suggests a new focus on Return on Invested Capital (ROIC) as a key measure.

A significant increase to Crown Castle's dividend is also recommended by Elliott Management.

A refresh of Crown Castle's board of directors is another recommendation made by Elliott Management.

Crown Castle trades at a large valuation discount relative to its publicly-traded peers, specifically American Tower (NYSE: AMT) and SBA Communications (NASDAQ: SBAC).