Tag Archives: Activist Investor

Activist investor takes aim at Crown Castle

[UPDATE 7/29/2020 – Crown Castle has bowed to pressure and is making changes. The Board will not now nominate a non-employee director who is 72 or older. That means three directors will step down in 2021 and two in 2022. The company also said it will be reviewing its executive compensation policy].

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.

Entrenched Board

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.

Elliott presentation on Crown Castle

Crown Castle responds to Elliott


Struggling Helicopter company switches to cash bonuses

Bristow Group, the struggling helicopter company with its head office in west Houston, announced that it has received a warning from the NYSE that its average closing price of its stock has been under $1 over the past 30 days. The company has 6 months to regain compliance with the $1 minimum share price. Otherwise the company could be delisted.

The share price is currently 37 cents (market cap $14 million).

Cash retention bonuses

In the same SEC filing, the company announced that it had paid cash retention bonuses to 9 executive officers.  CEO Don Miller got $945,000 and CFO Brian Allman got $400,000.

It also announced that, from Oct 1, 2019 onwards, certain executives will receive quarterly cash bonuses based on performance and operational targets. These will replace equity incentives. The target award is $942,000 for the CEO Don Miller and $250,000 for the CFO. The filing doesn’t specify how many executives will be receiving quarterly bonuses. The maximum bonus that could be paid out is double the target.

I don’t understand why Mr Miller and Mr Allman should be receiving retention bonuses at this time. Mr Miller was promoted from CFO to CEO on 1 March 2019 and Mr Allman was promoted from Chief Accounting Officer to CFO the same day. They should prove themselves in their current roles before being given retention bonuses.

Material weakness in Internal Controls

The company, which has a March year end, still hasn’t filed its 10-Q for the quarter ending December 31, 2018. The delay was because it found a material weakness in its internal controls related to certain covenants.

The company has a clause in its lending agreement that pledged engines in its helicopter fleet may be swapped with ‘loaner’ engines supplied by a maintenance company, provided that the ‘loaner’ is replaced with the original engine (or similar) within 180 days. The company found that some ‘loaner’ engines had been on the airframes for more than 180 days.

Failed acquisition and Expensive advisers

The company is coming off a spectacular failed acquisition that cost it a $20 million termination fee and elected not to make a $12.5 million interest payment on its senior loan notes. It has hired Alvarez and Marsal and Houlihan Lokey to advise on strategic alternatives.

The company has stated that in its upcoming annual report it will disclose a substantial doubt about the company’s ability to continue as a going concern.

Activist Investor

On May 8, an activist investor, Global Value Investment Corp, filed a proxy statement. It alleges that the company has failed to cut costs quickly enough. GVIC states that Bristow has

  • a fleet of 16 owned H225 helicopters that have not flown commercially since mid-2016 because of a fatal crash of another company’s H225 model. GVIC believes this fleet is worth at least $90 million. It alleges that Bristow has not actively tried to sell this fleet.
  • Two fixed-wing airlines, Eastern Airways (based in the UK) and Airnorth (Australia) that will have negative EBITDA for the year ended March 31, 2019. GVIC believes these could be sold for up to $230 million.

GVIC has called for the resignation of four directors and proposed its slate of alternatives. If GVIC gets control of the board it states it will replace Mr Miller as CEO.

If Mr Miller is forced out, he won’t have to pay back his retention bonus. He will also a severance payment equivalent to 2 x base salary of $700,000 plus prorated annual incentive target bonus ($770,000).

SEC filing

Global Value Investment Proxy