Crown Castle Stock: Activists Battle It Out (NYSE:CCI)

Last April, I started Crown Castle (NYSE:CCI) with a “Hold” rating, saying that while its small cell business could be a nice growth differentiator, that it faces headwinds in 2025 from the T-Mobile (TMUS) and Sprint merger. The stock is about breakeven since then, compared to a 16% gain in the S&P. More recently, in October said that while CCI was trading at an more attractive valuation, that it was still not expected to grow in the next two years and faced continued headwinds. A lot has happened since then, so let’s catch up on the name.

Company Profile

As a reminder, CCI is a tower REIT (real estate investment trust). It owns, operates, and leases cell phone tower in the U.S., largely to wireless customers. About 75% of its site rental income comes from Verizon Wireless (VZ), AT&T (T), and T-Mobile (TMUS).

The bulk of CCI’s towers are situated in the top 100 U.S. markets, with more than half in the 50 largest markets. Approximately 60% of its gross profit comes from land it leases, subleases, or licenses, with the rest from land it owns.

The company also owns a fiber segment, that comprises of 120,000 small cells on air and in backlog, and about 85,000 route miles of fiber. Small cells are used in densely populated major metropolitan markets to provide better coverage.

Activist Fight

The big news to come out of CCI since I last looked at the name is the involvement of activist investor Elliott Investment Management and founder and former CCI CEO Ted Miller. In November, Elliott sent a letter and presentation to CCI’s board asking for new leadership, a review and potential sale of its fiber business, a new management incentive structure, and improved corporate governance.

Elliott claims to have an over $2 billion stake in CCI, although its year-end 13-F filing only shows it owning 1,225,000 shares, which were valued at $141.1 million at the time. Elliott previously engaged with CCI’s board back in 2020 asking for changes, as well, saying it had a $1 billion at that time.

Soon after Elliott’s involvement, CCI CEO Jay Brown announced his retirement, which was much lauded by the activist firm. In December, CCI also appointed two Elliott nominees to its board: Jason Genrich and Sunit Patel. The two Elliott directors will also be a part of the company’s new Fiber Review Committee to help review what the best path for the business is. According to reports, Elliott believes the business is worth between $11-15 billion.

However, in late February, a new wrinkle was added to the CCI story when founder and former CEO Ted Miller stepped in and filed a motion in court to invalidate the agreement CCI and Elliott made in December. Miller called the agreement unlawful and that the agreement didn’t require Elliott to maintain an equity ownership position while getting all this power at the board level.

Miller, who was CEO from 1996-2001, meanwhile nominated his own board members, and laid out his own plan. It includes also selling the fiber business, layoffs, and capturing what it says is $1 billion in tax benefits that expire this year. He also want to initiate a $1.9 billion buyback from the proceeds that would come with the fiber sale.

Miller says under his plan, he could boost AFFO after discretionary Capex from $3 per share today to over $5 per share in 2025. He says he would cut the dividend to $4.62 a share from $6.26 a share and reduce debt to get to leverage of 5.4x.

Also at contention is how much of CCI Elliott actually owns, with Miller saying the firm sold 90% of its stake. Elliott has said that this is not true, but there actually is no proof it ever owned a $2 billion stake in the company. Its most recent 13-F shows CCI being a new stake and worth only $141.1 million. Two billion dollars is less than a 5% stake, which needs to be disclosed by the SEC, and Elliott’s position could be made up mostly of derivatives, which don’t have to be disclosed in a 13-F.

Right now, the one thing both activists seems= to agree on is that CCI should sell its fiber business. The tricky thing is that small cells were supposed to be one of the company’s big growth drivers moving forward, as wireless carries look to improve their data coverage and speed in major cities. Towers cannot be too close to each other, or they will interfere with each other, so small cells are used to help pick up the additional load in these highly dense markets. The company hasn’t been building any new Towers, but it has been building new small cells.

Now everyone involved is saying small cells is a great business, just not for CCI and that it should be owned by someone else. That likely isn’t going to help with the price if the company decides to sell.

Nothing also will fix the $200 million in Sprint tower rent churn off the company will see in 2025. CFO Dan Schlanger explained the expected fall-off at a Morgan Stanley conference in November, saying:

“So if in this case, Sprint and T-Mobile were on a single tower at the same time, they took down the Sprint equipment and left the T-Mobile equipment. Therefore, we have consolidation-related decommissioning that is happening in our business. The majority of that is on the tower side. There’s $200 million of decommissioning that we expect to occur at the beginning of 2025, which will take $200 million out of the revenue of towers. On the small cell side and fiber side, we’ve already recognized about $45 million of reduction. We have another $25 million to realize between 2024 and 2025. And for that, as you pointed out, in 2023, we got early termination fees of about $165 million to pay us for the remainder of the contract that was in place with T-Mobile when they chose to decommission certain of the sites on the small cell side of our business. Basically, that’s a whole bunch of noise around an underlying business model that’s going really well because if you go back to what I talked about earlier, the revenue growth is really what we focus on most because that’s the long-term growth of the business.”

Meanwhile, the business is expected to see decline this year as well. When CCI reiterated guidance in late January, it saw site rental revenue falling -2% at the midpoint of its guidance to $6.34 billion, net income dropping -17% to $1.25 billion, adjusted EBITDA falling -6% to $4.16 billion, and AFFO per share slipping -8% to $6.91. The business is growing in some areas, but overall the company will not likely show any growth in 2024 or 2025.

While Elliott and CCI’s founder battle it out, overall, the company continues to face headwinds over the next two years. Once those are alleviated and if the small cell business is sold, it should be a modest grower from price escalators (about 3%) and some continued 5G network spend. Overall, though, it should be about a 5-6% revenue grower coming off a lower 2025 base.

Valuation

CCI trades at 18.4x EBITDA based on 2024 analyst estimates of $4.15 billion. Based on the 2025 consensus of $4.11 billion, the stock trades at an 18.6x multiple.

Based on an AFFO forecast of $6.91, it trades at a 15.8x price-to-AFFO ratio.

The stock trades at the lowest valuation of its two closest peers, American Tower (AMT) and SBA Communications (SBAC). It has typically traded between 19-21x EBITDA prior to the pandemic.

Based on that, I’d fairly value the stock at between 19-21x 2025 EBITDA, which would be a price of between $112-$131.

Conclusion

The involvement of Elliott has helped CCI’s stock, although the battle between the firm and CCI’s founder likely won’t be good for the price of CCI’s fiber business if it decides to sell it. However, it would make sense to use any proceeds to help pay down debt and buyback stock. Also, I agree that CCI likely could run a leaner operation.

Overall, CCI won’t grow this year or next, and then it should be a modest grower thereafter. Tower REITs have always commanded high multiples even with modest growth, so I don’t expect that to suddenly change. As such, I think the stock has some moderate upside from here, and my target is $121. I continue to rate the stock a “Hold.”

The biggest risks to the downside would likely be a failed sale of its fiber business, or any big cutback in wireless spending. The biggest upside catalysts would be getting a good price for the fiber business and then initiating a nice buyback. Any pick-up in wireless capex would also be nice boost.