What Will Elliott Get From Crown Castle?

Elliott Investment Management launched a second offensive on Crown Castle (NYSE: CCI) this week, calling for new management and an extensive review of the company’s fiber business. The $60 billion fund reported a $2 billion stake in Crown Castle, representing about 4.4 percent of Crown’s total market capitalization prior to Elliott’s announcement. (Three days after the announcement, the stock was up 12 percent from its Friday, November 24 close. If Elliott’s stake was worth $2 billion at that time, it was worth $2.24 billion by Thursday.)

“Restoring the Castle” is the name of the 50-page presentation Elliott prepared for Crown Castle’s board and investors. The document combines charts detailing the returns of Crown’s fiber business with images that look like they came from a child’s fairy tale book: castles nestled in snowy mountains and a royal purple carpet leading into a Gothic archway. 

Crown’s actual castle is a modest silver blue building on the part of I-10 known as the Katy Freeway, several miles west of Houston. It is to this headquarters building that Elliott has been sending letters demanding change. On Monday November 27, the firm wrote to Crown Castle’s board demanding changes in executive management, board leadership and corporate governance. Elliott also wants an executive incentive plan based on returns on invested capital and a review of the fiber business. On November 28, Elliott followed up with another letter demanding an inspection of Crown’s records related to a change in its bylaws, which Elliott says was designed to protect management by preventing communication between shareholders.

Also on November 28, Crown Castle made an announcement of its own. The company said Chris Levendos has been promoted to the role of EVP and COO. Levendos has been leading Crown’s fiber business and now takes over as COO of its tower business as well. Levendos has been acting COO of the tower business since October 1.

The promotion of Levendos may signal that Crown’s current leadership remains committed to the company’s fiber business, which it assembled over several years through a string of acquisitions. As Elliott points out, Crown has invested billions more in its fiber business on top of the acquisitions.

“The review must determine whether Crown is the best long-term owner of the fiber business,” Elliott writes in its 50-page illustrated document. But an evaluation of Crown’s long-term plans seems to be at odds with the rest of Elliott’s communications, which are summarized by its argument that “investors have waited long enough” for Crown to generate better returns from its fiber business. 

The Elliott proposal is more about accelerating a turnaround in Crown Castle’s stock price than it is about the long-term value of Crown Castle’s 85,000 route miles of fiber. If anything, projections for bandwidth demand have increased since Crown started investing in fiber. But monetizing those investments has taken longer than expected since Crown’s core customers, the wireless carriers, have decided to invest in their own fiber and small cells, cutting their demand for Crown’s neutral host solutions.

In the past, the carriers have sold infrastructure assets when they needed to raise capital. That’s how Crown Castle and American Tower (NYSE: AMT) came to own many of the towers they manage today. So far there have been no indications that AT&T (NYSE :T) or Verizon (NYSE: VZ) will sell small cells or fiber, but we did see AT&T turn to BlackRock in a deal that gives the asset manager half ownership of its Gigapower fiber network. The carriers’ core business is selling connectivity and designing, building and operating the networks to create that connectivity. They don’t have to own the underlying infrastructure in order to do that.

Crown Castle’s diversification into fiber is definitely taking longer than expected to pay off, which is not producing the fairy tale ending Elliott wants. If the activist investor wants to ultimately help Crown sell its fiber business, it will need to find a buyer with a more patient set of shareholders, and perhaps with a more diverse set of customers. 

Analyst Gregory Williams of TD Cowen has suggested the most logical buyer for Crown’s fiber business might be DigitalBridge Group (NYSE: DBRG). Williams wrote this week that DigitalBridge could “feed the enterprise fiber to Zayo and merge the small cells business to Extenet.”

By Martha DeGrasse, Inside Towers Contributing Analyst

This article represents the opinions of veteran telecom industry editor and journalist Martha DeGrasse, an Inside Towers Contributing Analyst with features appearing monthly. DeGrasse owns Network Builder Reports and contributes regularly to several publications. She was formerly a writer and editor with RCR Wireless and a TV business news producer.

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