Where Elliott Management’s Attack on Crown Castle Small Cell Strategy Hits and Misses

We reviewed the Elliott Management slickly produced attack on Crown Castle ($CCI).  In short, Elliott Management believes that CCI has underperformed its peers, American Tower (AMT) and SBA Communications (SBAC).  While the underperformance is clear, I also think that Elliott Management’s analysis (carefully?) fails to give any credence to the opportunity that fiber/small cells may provide to Crown Castle that its peers will miss if small cells take off.

WHERE IT HITS

1. 1. I agree that foreign investment in towers is preferable – we have been pointing to American Tower ($AMT) among the Big 3 as our top pick for a few years now based primarily on the diversity of their international portfolio and their focus on new-builds. 
   2. I don’t understand why CCI’s management abandoned international tower development or acquisition while focusing on fiber acquisition.  They aren’t mutually exclusive and CCI was just as privy to the 3G/4G cycle of growth in the US that is occurring internationally now. 
   3. I agree that CCI is better positioned in the US for 5G buildout on towers  (we previously did point by point analysis on Rural/Suburban/Urban towers for big tower companies and came to similar results- also looked at # of competing towers per tower company tower and CCI was generally higher than its peers which shouldn’t matter as much anymore given the reduction of new macrocell builds).
   4. I suspect that CCI could do a better job managing the fiber business side of their fiber acquisitions.  
   5. I believe that the window for the current strong growth on existing towers in the US will be strong for the next 3-4 years and then start to taper, while international will stay strong or even accelerate.
   6. One point not mentioned in the analysis but favorable to Elliott’s guidance is that CCI’s focus on small cells has likely negated some of their strength in negotiating Master Lease Agreements (MLAs) with the wireless carriers vis-à-vis their competitors who can afford to be “ornerier”.    

WHERE IT MISSES

1. 1. There is very little analysis of the future of CCI fiber/ROI as it pertains to small cells in the US.  I am unsure from the writeup whether Elliott simply doesn’t believe lease-up will occur or they are ignoring what has to be CCI’s main justification for their strategy. Elliott’s analysis shows tower level economics but omits entirely any small cell economics. Elliott’s writeup is solely focused on near term ROI.  If near term ROI is the only metric of concern, then no company would have pursued new build towers in the nascent days of cellular nor would any company pursue a multi-tenant small cell fiber centric build. It took two decades for the wider investment community to appreciate the tower model.   
   2. I believe it is too early to tell on the possible success/failure of CCI’s small cell strategy.  We don’t see how CCI can’t significantly increase ROI in the short term without changing the way they build fiber- which would negate the upside from future small cell deployments which require greenfield builds to see higher collocation rates
   3. I agree though that the time horizon for ROI seems to be pushing further out than expected.  We also suspect that the time horizon on maturing these “immature assets” is longer than CCI expected.  We don’t know if this is because of poor execution or unrealistic expectations.  (If the latter, then we had unrealistic expectations as well).  Other than Verizon, the wireless carriers haven’t adopted small cells as fast as we might have expected.  Elliott’s writeup ignores completely 
   4. Eventually, the providers will focus on small cells.  Whether they will rely upon CCI or self-build or otherwise will depend upon how much impact Verizon’s aggressive build plans have on subscriber retention/growth.  The more success Verizon has, the faster the other carriers will need to deploy which will be beneficial to the lease-up of CCI’s fiber holdings. 
   5. I also believe there should be upside in the future especially to smaller entrants to the market who need a mobile strategy (or MVNOs that want to reduce MVNO costs)  

WILL THIS CHANGE HOW CCI REPORTS ON SMALL CELLS?

 I am hopeful that Elliott’s missive causes CCI to provide more transparency on their small cell success or lack thereof. I have found CCI’s reporting to be cryptic especially how they treat collocation of small cells and in their sharing of details related to typical MLAs.   Unlike towers where the economic model is simple and transparent, CCI’s small cell program is an enigma. It is difficult to verify or analyze and, in that regard, it makes me (and I assume investors) suspicious of CCI. There seems to be a lack of clearly enunciated goals (at least to the investor community) related to small cells.  CCI has benefitted from being part of the less understood 5G investment opportunity window where anything 5G related is attractive.  However, as the allure of the “shiny bauble” of 5G fades and its reality (positive and negative) develops, investors large and small are starting to ask more intelligent questions which will require better information from CCI than is currently provided.