Crown Castle International Corp. (CCI) shares shot up 5% early Monday after Elliott Management Corp. launched a campaign urging the communications infrastructure REIT to cut investment in fiber, hike its dividend, shake up its board and adjust executive pay plans.
The activist fund takes issue with the Houston-based communications tower-focused REIT’s move to invest $16 billion over the past few years, including $11 billion in acquisitions since 2012, into the fiber industry.
It wants the REIT cut fiber deployment investments to as little as about $600 million annually in 2021, with a similar amount of investments in following years. For context the company spent about $1.4 billion in fiber capital expenditures 2019.
Crown Castle owns about 40,000 U.S. towers and 80,000 miles of fiber in the U.S.
The activist also wants the company to adjust its senior executive compensation strategy to encourage fewer, more targeted investments in fiber. It also takes issue with long-tenured directors, some who serve as chairs of the company’s board subcommittees.
Crown Castle’s two major cell tower rivals, SBA Communications Corp. (SBAC) and American Tower Corp. (AMT), haven’t invested in fiber and generally performed better from a shareholder perspective over the past few years, one analyst following the company noted.
However, he added that Crown invested heavily in fiber so it could focus some energy on small cell towers, which are essentially towers often connected to lamp posts that are used to provide better coverage in heavily congested areas, such as Times Square in New York.
“It’s a debate,” the analyst said. “If you limit investment in capital expenditures now and convert a lot of that into a dividend will you be disappointed five years from now when small cell towers are all the rage?”
Another analyst defended Crown Castle’s investment in fiber. “While we understand many of Elliott’s suggestions, we continue to see the value of [Crown Castle’s] fiber strategy,” said Wells Fargo analyst Jennifer Fritzsche in a report Monday. “As the largest owner of U.S. marco sites – we believe [Crown Castle] is well equipped to leverage both macros and small cells as important tools in the 5G ecosystem tool box.”
In a statement, Crown Castle defended the fiber and tower investment strategy, noting that “by continuing to execute’ on its plan to “own and operate this critical infrastructure within the communications ecosystem in the United States we believe we are providing the best opportunity for Crown Castle to generate significant growth while delivering compelling returns for shareholders.” The company noted that members of its board and management team have met with Elliott “multiple times” to fully understand and evaluate its assumptions and proposed changes to its strategic plan. It added that it remains open to “a dialogue” with Elliott.
Roughly one-third of the company’s revenue is derived from fiber and fiber associated with small cell towers. The company made a number of acquisitions in recent years to expand into the fiber sector, including 2017 purchases of Lightower Fiber Network for $7.1 billion, Wilcon for $600 and FPL Fibernet for $1.6 billion. It also bought Sunesys in 2015 for $1 billion and Next-G Communications Inc. in 2012 for $1 billion.
Crown Castle has said it doesn’t plan to make any further acquisitions. However, Elliott Management notes in a letter to the REIT’s board that it has thought about where the company should consider selling some or all of its fiber business, though fund managers acknowledge that such a move would likely be disruptive “in this market environment.”
“One potential solution is to sell or spin off the fiber business,” Elliott partner Jesse Cohn and Jason Genrich, portfolio manager, said in the letter.
Despite a substantial price dip in March amidst Covid-19, Crown Castle shares have recovered and performed reasonably well recently. The REIT’s share price recovered and has improved, trading recently at $175.45 a share from lows of about $117 a share.
The fund would like Crown Castle to use proceeds from significant reductions in fiber capital expenditures to hike its dividend to $7 a share in 2021, a 46% increase from its current dividend level.
Elliott criticizes Crown’s Long Term Incentive Plan, the company’s program for vesting of senior executive equity compensation. Crown Castle in 2018 set up a program providing payments if it outperforms the S&P 500 or meets a goal of 11.5% annualized return, shifting away from a plan that provided incentives based on the company’s total shareholder return compared to its peers.
In its presentation, Elliott argued that the adjusted incentive plan is an acknowledgement that it is underperforming its peers, SBA and American Tower. The fund wants Crown’s incentive plan and overall executive pay program to focus on return on invested capital, which is not disclosed, as well as based on a comparison to SBA and American Tower.
Elliott is a frequent employer of director elections to drive its activist agenda. Crown’s deadline for nominating directors for its 2021 annual meeting is Feb. 14. It is likely that the public presentation is intended to mobilize institutional investors and the analyst community to support the insurgency.
There are a number of directors Elliott could target as being over boarded. According to relationship mapping service BoardEx, a sister company of The Deal, six of 12 directors have served for over 15 years. Directors James Martin, 74, Robert McKenzie, 77 and Lee Hogan, 76, have served on the board for more than 25 years and Edward Hutcheson, 75, has been in his chair for 19 years. Martin is Crown’s independent chairman and Hutcheson is co-founder. The fund notes that only two of 11 directors are female, adding that it could add “greater diversity” to the board.
An activist has pushed for a dividend hike at Crown Castle in the past, with some success. According to FactSet, Corvex Management LP’s Keith Meister in 2014 urged the REIT to improve its capital allocation strategy and hike its dividend payout ratio. In response, Crown Castle declared an increase in its dividend, FactSet noted.
Morgan Stanley & Co. is providing financial advice to Crown Castle, which also tapped Cravath, Swaine & Moore LLP partners Stephen Burns, Erik Tavzel and Andrew Elken for legal advice.