October 16, 2014 – The timing, really, could not be worse. Unless you are a stockholder, of course. In the middle of performing due diligence and possibly raising debt and equity for a bid on Verizon’s towers, Crown Castle is facing tension among its investors.
Activist investor Corvex Management, which owns a $1 billion stake in the tower company, has told the tower company it must “correct its capital allocation plan” and reduce its cost of capital before it bids on the 12,000 tower portfolio.
In a letter to shareholders, the investment advisor said Crown Castle would be the best positioned bidder from a strategic standpoint but not from financial point of view, because its stock price is depressed.
“We believe Crown Castle’s current capital structure and capital allocation plans taken together are sub-optimal, and that the combination of de-levering the balance sheet while maintaining an artificially low payout ratio has pressured the company’s valuation and led to Crown Castle trading at a discount to its peers,” Corvex wrote.
To improve its valuation, the tower owner should either begin paying more than $4 a share in quarterly dividends or pay $1.60 per share in dividends combined with ongoing buybacks, according to Corvex. These capital allocation changes would drive a 27 percent re-rating of equity in the short term and possibly a 60 percent improve in the long term, the investor asserts.
“Once the company’s equity currency has strengthened, Crown Castle can aggressively pursue a Verizon towers transaction, creating even greater long-term value for shareholders. However, if the company does not have the right cost of capital, it should not be pursuing acquisitions or issuing equity, whether for Verizon’s towers or any other transaction,” Corvex wrote.
Corvex believes “excessive equity funding” was used by Crown Castle last year in its purchase of AT&T’s Towers for the “relatively high price” of $4.85 billion for 9,700 sites.
“It is critical that the company avoid a similar stumble in any potential Verizon transaction,” Corvex wrote.
Corvex noted that a higher payout ratio would increase Crown Castle’s appeal to REIT investors, while also attracting yield-oriented investors.
Jennifer Fritzsche, senior analyst, Wells Fargo Securities, expects Corvex’s letter and the two options to be well received by shareholders.
“We believe the shift toward increasing its payout ratio, coupled with the recurring nature of its dividend secured by the Big 4 wireless carriers, would be viewed positively by yield investors,” she wrote.
Crown Castle acknowledged that it had received the Corvex letter and said the tower company plans to address capital allocation policy, including dividends, on its 2014 third quarter earnings call scheduled for October 31, 2014.
“We receive input from many of our shareholders on a regular basis, and we welcome the dialogue and perspective,” Ben Moreland, Crown Castle president and CEO, said in a prepared statement. “Over the last decade, we have returned more than $3 billion in capital to shareholders through share purchases and dividends. We continually review our capital allocation strategy and consider all input from our shareholders as we aim to create long-term shareholder value.”