Elliott Management, the activist investor, has gone public with its criticisms of Crown Castle. In short, Elliott believes the company has under performed because it has invested heavily in fiber investments which give a low return on investment.
Crown Castle has a market capitalization of $71 billion, the largest of any company with its head office in Houston. It owns 40,000 wireless towers in the US. The company is one of the big three US players in wireless towers along with American Tower (market cap $113 billion) and SBA Communications (market cap $32 billion).
The company suffered an accounting embarrassment in February when it admitted it had overstated equity by $463 million as it had recognized too much revenue on tower installation services. It had to restate its financial statements for 2017 and 2018. The SEC are still investigating.
Elliott stated it had a $1 billion economic interest in the company and has been conducting a private dialogue with the management for the past month.
Elliott is very complimentary about the tower business. As a market, tower leasing is very profitable and highly cash generative. For the Crown Castle’s tower business, EBITDA minus capex has been over $2 billion a year.
Low return Fiber business
However, while the other two big players are expanding into international towers, Crown Castle made the decision to expand into fiber. It owns 80,000 route miles of fiber in the US, primarily through five acquisitions made since 2012 for a combined $11 billion. According to Elliott, capex is 149% of EBITDA for the fiber business. As a result, towers have a return on investment of 20%, while fiber has a return of 3% (compared to a cost of capital of 8%).
Moving the goalposts on the compensation plan
Elliott also takes aim at the current Crown Castle compensation plan. Currently annual bonuses are based on only two metrics – adjusted EBITDA and Adjusted Funds from Operations (AFFO) per share. AFFO is a complicated non-GAAP metric but it is basically net income plus real estate depreciation. The major difference between the two metrics is interest expense. Neither metric takes into account discretionary capex.
Elliott also complains that, in 2018, Crown Castle changed its Long Term Incentive Plan so that instead of measuring total stockholder returns against its peers, it switched to measuring against a mix of the S&P 500 and a goal of 11.5% annualized return. Given the high growth rates in the tower business, this lowered the bar for achievement.
Elliott would also like to see changes to the Board. 8 of the 11 non-executive directors have served for at least 13 years. This includes two former CEOs of Crown Castle. The Chairman of the Board, Landis Martin has been in that role since 2002.
The company responded by stating it had a proven track record for creating shareholder value. It didn’t commit to any changes but said it would remain open to having a continuing dialogue with Elliott.