Crown Castle’s (NYSE: CCI) fiber/small cell strategy looks like a page out of hockey great Wayne Gretzky’s playbook: “I skate to where the puck is going to be, not where it has been.”
CCI is balancing its macro tower business with a fiber/small cell infrastructure it believes will support escalating mobile data usage demand.
Elliott Management, a major shareholder with about $1 billion in CCI stock, begs to differ. In its tome, “Reclaiming the Crown,” Elliott articulates why it thinks that CCI is overinvesting in its fiber/small cell business without realizing return-on-investment it enjoys with macro towers.
Elliott is not asking for CCI to cease its fiber/small cell activities, rather to moderate them so they yield bigger payoffs for investors.
To make its case, Elliott compares CCI’s financial performance to its “Big 3” peers, American Tower (NYSE: AMT) and SBA Communications (NasdaqGS: SBAC).
Elliott rightly points out that the U.S. macro tower business has matured. Organic growth prospects are limited. At year-end 2019, the Big 3 together owned over 97,000 towers, nearly 50 percent of the FCC-registered tower base. That tally has plateaued since relatively few new macro towers are being built.
Towerco revenue growth comes from adding new tenants to existing towers, acquiring towers from mobile network operators or other tower owners, and lease escalators.
Faced with predictable, yet slow-growth prospects in the domestic market, the Big 3 strategically expanded beyond their core macro tower business.
AMT and SBAC took their tower-only business models into international markets, mainly through acquisition.
At year-end 2019, AMT owned nearly 180,000 towers worldwide with 41,000 towers in the U.S. and almost 137,000 towers internationally, mainly in India, Latin America and Africa with about 75,000 towers in India, its largest market. Of its 2019 $7.4 billion leasing revenues, AMT derived 55 percent from the U.S. with just 23 percent of its total tower base.
Similarly, SBAC owns over 32,000 towers split roughly 50-50 between the U.S. and international markets mainly in Brazil and South Africa. International markets contributed just 20 percent of SBAC’s 2019 $1.9 billion leasing revenues.
By contrast, CCI stayed state-side and expanded into the fiber/small cell business to complement its 40,000 macro towers.
Since 2012, CCI has invested $11 billion in fiber/small cells. It acquired established fiber networks and steadily increased its proportion of capital expenditures to where fiber/small cell accounts for 70 percent of CCI 2020 $2 billion capex guidance.
Today, CCI owns 80,000 fiber route-miles and nearly 45,000 small cells. Its fiber/small cell segment in 2019 accounted for about one-third of CCI’s $5.1 billion site rental revenues with Verizon as its main small cell customer.
Elliott compares total invested capital and EBITDA growth for the Big 3 from 2010 through 1Q20. AMT and SBAC each yielded 11 percent EBITDA growth with aggregated M&A and capex of $33.5 billion and $9.9 billion, respectively, over that period. Comparatively, CCI produced a lower 8 percent yield on the $29.9 billion M&A and capex it invested.
A prudent investor like Elliott should challenge CCI’s management, strategy and expected outcomes.
The question is: are they putting the right weighting on the right factors?
CCI’s fiber/small cell business requires significant upfront money and time to install wide area cable networks, especially in the top 25 U.S. markets where CCI operates. Reducing fiber capex helps short-term cash flows but does not diminish the overall fiber investment mandate. Once complete, though, CCI can add unlimited capacity anywhere on its network merely by upgrading the fiber optic terminals.
With the promise of 5G especially in mmW frequencies, small cell deployments are just getting started. In this regard, CCI’s fiber/small cell operation can generate revenue and profitability for years to come even as it sustains its macro tower business.
Long-term, AMT’s and SBAC’s international tower play likely will remain the minor revenue and EBITDA contributor. International MNOs charge lower usage rates and in turn expect to pay lower tower rents.
By John Celentano, Inside Towers Business Editor
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