Last week, Elliott Investments unveiled its public shareholder activist campaign against Crown Castle. This invoked some very strong but also very mixed emotions for us. Here we want to explore Elliott’s campaign. We do not have a side in this (and no positions in any of this), but Crown Castle is an important company and merits the attention.
First, we are not exactly fans of activist campaigns. There are some smart activist funds out there which do good work in keeping wayward management teams in check. But there are also a lot of rank opportunist funds out there, applying copy and paste campaigns, forcing companies to do non-commercial things in the quest of short term gains for the activist. Elliott is a serious fund, and we assume they are in the former camp, so we take their concerns at face value.
By contrast, Crown Castle is one of the leading tower companies in the US. Tower companies own critical pieces of modern infrastructure – sites and operations for cellular towers and base stations. Twenty-ish years ago, the big US mobile operators shed much (but not all) of their tower assets in what was then seen as a form of capital discipline, or some such. Then as smartphones became critical to our daily lives, the US tower operators’ value surged. Today, the three big US providers effectively possess a triopoly. At heart, tower operators are real estate businesses where location is critically important. So in effect, the tower companies operate a network of local monopolies. As a result, working with these companies is … not easy. We are not saying they are bad people, it’s just that they have all the leverage, and so it should come as no surprise that they do not return phone calls in a hurry. This works fine for the big three mobile operators, but is definitely a limit for anyone launching a new networked service. Overall, we would love to see the tower companies overhaul their approach to new businesses, but that is not what Elliott has in mind.
To advance their campaign, Elliott set up a website, “Restoring the Castle“, complete with two separate letters to the board and a 50 page presentation laying out the details of their case. They even have a photo of an old castle, sitting on some forlorn, snow-bound hill. If nothing else, the graphic design of this whole thing should demonstrate Elliott did not come to play. And they have a lot more than graphic design.
Elliott’s case has two legs – a legal side and a strategic side. The legal side covers several policies the Board put in place around compensation, board voting and “shareholders’ rights”. The key point we took away from reading them is that Elliott wields a formidable cudgel in the form of grounds for a future lawsuit. We are not going to dwell on the legal side of the campaign as it is beyond the confines of our non-existent law degree. However, having seen a lot of these activists campaigns, this threat looks more serious and prepared than is usual.
On the strategic side, Elliott’s chief complaint is that Crown Castle has focused on its fiber build-out, as opposed to its peers who spent the last decade acquiring assets overseas. Laying fiber is incredibly expensive, and Elliott’s position is that beyond the expense it has not been well run and is ‘destroying value’, as evidenced by a whole range of metrics, not least Crown Castle stock’s sharp underperformance. Elliott first approached Crown Castle about this three years ago. In the interim, we had a pandemic, and a lot of federal money thrown at building fiber. So it looks like Elliott hit pause in 2021 to see how things would play out. Not well. The US is now awash in a glut of fiber that no one really seems to need. And so Elliott is back, and they seem extra annoyed by having been ignored three years ago.
It is too soon to tell how this will play out. Crown Castle’s stock is up in recent weeks. Elliott does not see to have kept its intentions a total secret. The stock price performance implies the Street likes what they are hearing and are buying up the stock because they believe Elliott is right. Set against them is the slowing of US mobile operators’ build out. This is likely a headwind for the entire sector, but may diminish the spread between Crown Castle’s stock and its peers. The company did publish a response to Elliott’s letter. These have to be carefully written, with lots of attention from lawyers, and so typically companies do not say much. That being said, the company’s response is particularly brief, conveying the impression that this took them by surprise. All in all, we think Crown Castle has its fight cut out for it.