Seeing a significant value opportunity as 5G wireless communications network deployments accelerate, Elliott Management recommends for Crown Castle International a return on investment (ROI)-focused fiber investment approach and an increase in dividends per share to $7 in 2021 and $8 or more in 2023. Elliott Management is the management affiliate of American hedge funds Elliott Associates and Elliott International.
Yesterday, Elliott Management released a letter and presentation outlining a path to greater strategic focus and value appreciation as part of a plan it calls Reclaiming the Crown, which is intended to substantially enhance corporate governance and oversight at Crown Castle. Elliott Management sees what it calls a uniquely compelling value opportunity represented by Crown Castle’s U.S. tower portfolio and the substantial improvement available in the company’s fiber business.
Elliott Management has been engaged in a private dialogue with the Crown Castle for over a month, according to the letter, which it said was made public to facilitate a broader discussion of the best path forward for Crown Castle. This would interest Elliott Management because, the letter said, it manages funds that collectively own an economic interest of $1 billion in Crown Castle.
According to the materials, Crown Castle has benefited from its ownership of one of the largest portfolios of domestic tower assets but has underperformed its potential and comparable peers by a wide margin for more than a decade. “This consistent underperformance is directly attributed to the company’s fiber strategy, which has yielded disappointing returns despite $16 billion of investment,” a news release from Elliott Management reads.
In the materials, Elliott Management recommends a series of initiatives to improve Crown Castle’s performance and better align corporate governance and management incentives with shareholders:
● ROI-focused fiber capex: Crown Castle’s return on investment in fiber is well below industry benchmarks, according to Elliott Management. It said Crown Castle should refocus on its highest return opportunities and target a fiber capex revenue ROI of at least 40 percent.
● Optimized incentive plan: Crown Castle’s current incentive program is not aligned with the capital intensity of its fiber strategy, the news release reads. In Elliott Management’s view, Crown Castle should incorporate return-on-invested-capital (ROIC) to align capital allocation decisions with compensation appropriately.
● Enhanced returns: The “Reclaiming the Crown” plan will increase free cash flow by 35 percent while still allowing for $600 million per year of discretionary fiber capex, providing capacity to increase the dividend by 46 percent to $7 per share in 2021 and growing 7 to 8 percent thereafter ($8 per share or more in 2023).
● Improved oversight: Elliott Management said that Crown Castle should address what it calls the company’s extraordinarily long-tenured board of directors to improve oversight of its capital allocation approach and ensure Crown Castle’s underperforming fiber business has the appropriate management skillset to deliver improved results. “Additionally, Crown Castle’s board would meaningfully benefit from greater diversity to improve its performance, culture and value for all stakeholders,” the news release reads.
Elliott Management stated that it believes the implementation of these steps will highlight the value of Crown Castle’s U.S. tower portfolio and lead to a refined fiber investment strategy with greater investment returns, higher cash flow and, ultimately, more value for Crown Castle and its shareholders.
The July 6 letter, signed by Elliott Management partner Jesse Cohn and portfolio manager Jason Genrich, says Crown Castle’s pivot to fiber led its shareholder returns to underperform in comparison with competitors American Tower and SBA Communications’ shareholder returns on a consistent basis for more than a decade. “The level of underperformance is profound, and the power of compounding has resulted in a staggering gap between Crown Castle and its comparable peers,” the letter reads.
Crown Castle responded in public to the Elliott Management letter by way of a news release the same day, referring to its portfolio of towers, small cell networks and fiber as unmatched and as integral components of communications networks shared among multiple tenants.
The news release does not single out the ROI in fiber that Elliott Management said is below industry benchmarks. Instead, it describes Crown Castle’s portfolio of assets as unique, with unparalleled capabilities and strong customer relationships that position the company well “to capture the upside of the anticipated decade-long investment cycle required to meet the increasing demand for mobile data and deploy 5G in the United States.”
The Crown Castle news release does not address Elliott Management’s suggested dividend increase of 46 percent in 2021, except to state Crown Castle’s confidence in the company’s ability to generate what it called compelling value for its shareholders, including growing its dividend per share by 7 percent to 8 percent per year.
“Members of our board and management team have met with Elliott multiple times to fully understand and extensively evaluate their assumptions and proposed changes to our strategic plan,” the Crown Castle news release reads. “While we firmly believe our strategy best positions Crown Castle to deliver near- and long-term value creation, we remain open to having continuing dialogue with Elliott, as we do with all shareholders.”