Crown could have a hard time defending the castle this time say analysts

After publication of the news yesterday that Elliott Management was calling for leadership changes at Crown Castle and a review of the company’s fiber strategy, Crown Castle issued this statement. "We value the views of all our shareholders as we seek to better understand their perspectives on our strategy, performance and business objectives. We look forward to reviewing Elliott’s materials and are open to commencing a constructive engagement with Elliott. The company’s board of directors remains confident in Crown Castle’s executive leadership as the company continues to act in the best interests of all shareholders."

Analysts at both TD Cowen and MoffettNathanson said that times have changed since Elliott made similar complaints in 2020, and Elliott may have more leverage now.

MoffettNathanson noted that after Elliott expressed concerns in 2020, Crown “increased its dividend at an above-trend rate, made certain improvements to its disclosures, refreshed its board, and made the case for its fiber strategy, which put a lid on things.”

But the analysts at TD Cowen, led by Gregory Williams, noted that this time around it might be harder for Crown to fend off major changes. TD Cowen cited three factors unfavorable to Crown:

  1. There are more skeptics on fiber/small cell performance. Crown’s leadership has argued that its capital investments in deploying fiber to small cells will take time, but it will ultimately pay off. TD Cowen wrote, “In 2020, the small cell story was still new, thus too early to make a definitive call on the materialization of fiber returns. Three years have passed, and we’ve seen both lackluster fiber results from Crown as well as lackluster fiber/small cell results across the industry. The shift toward more negative sentiment should garner more attention from investors.”
  2. In 2020, Crown shares were at all-time highs. But now they’re at near 6-year lows.
  3. Crown’s financial position is in worse shape, and its stock under performance has primarily been driven by the capex that the fiber/small cell business requires. The TD Cowen analysts note that Crown is caught between dividend demands and funding its small cell growth. “Curtailing capex may prove difficult given the 60,000 small cell node backlog that Crown must work through given contracted master lease agreements with T-Mobile and Verizon,” wrote TD Cowen. The analysts wonder if Crown will be able to slow its fiber/small cell spend without revisiting its MLAs. “Admittedly with 5G not bearing fruit, carriers may be open to this idea,” said the analysts.

Moffett Nathanson said that Crown Castle is not in a position to raise its dividend as a defense against Elliott. And while small cell installations are expected to accelerate in 2024, the return profile of fiber has yet to improve.

Moffett added that this latest move by Elliott “could quickly turn into a fight for control of the board if the company does not make concessions.”

However, it’s not clear what those concessions should be.

Moffett said, “We believe there’s truth to Elliott’s argument that fiber investments have not generated returns consistent with the company’s thesis. But it’s not obvious to us that there is dramatic upside stemming from alternatives for the fiber unit, whether reducing capex or selling the business.”

And TD Cowen said that while selling the fiber/small cell business would result in the fastest way toward stock appreciation, a sale could prove difficult at this time.