Corvex Issues Letter, Presentation to Crown Castle Holders, Urges Dividend Raise, Reduction in Cost of Capital

Corvex Management LP, which managesinvestment funds that own beneficially or economically approximately 12.6million shares and share equivalents of Crown Castle International Corp.(NYSE: CCI) ("Crown Castle") representing economic exposure of approximately$1 billion, today released a letter and presentation to Crown Castleshareholders outlining a proposal to improve the company's capital allocationstrategy to strengthen Crown Castle's valuation, reduce its cost of capital,and enhance the company's ability to continue to grow and compound shareholdervalue. "Given the increased public debate around Crown Castle's capital allocationpolicy as well as the potential for a Verizon towers transaction in the nearfuture, we feel compelled to share our views publicly," said Keith Meister,Managing Partner of Corvex.  "We believe Crown Castle's valuation can beimproved dramatically and sustainably by changing its capital allocation plan,expanding the company's investor base and closing its discount to peers andintrinsic value.  We commend management for soliciting input from us and ourfellow shareholders regularly, and we look forward to working together tocreate value for all Crown Castle shareholders."  A copy of the presentation can be obtained at CorvexCCIpresentation.com.  Thefull text of the letter to Crown Castle shareholders follows: October 14, 2014712 5^th Avenue, 23^rd FloorNew York, NY  10019 Dear Shareholders of Crown Castle,Corvex is an investment advisor with a fundamental-based long/short equitystrategy and approximately $7 billion of assets under management.  We focus oninvesting in high quality, North American businesses in industries withpositive secular tailwinds, and we look for situations where change andevent-specific volatility enable us to buy the securities of strong businessesat discounts to intrinsic value.  We believe in engaging regularly with themanagement teams of our portfolio companies with the goal of developing closelong-term relationships underpinned by constructive two-way dialogue.  We haveinvested in and followed Crown Castle and its tower peers since the inceptionof Corvex in 2011.  Corvex funds have beneficial or economic ownership ofapproximately 12.6 million shares and share equivalents of Crown Castle whichat current market prices represents approximately $1 billion of economicexposure, making us one of the company's largest investors and the positionone of our largest investments.We are optimistic that many of you share our view that Crown Castle is a greatbusiness with exceptional growth opportunities in the years ahead.  However,we also believe many of you share our frustration over the company's stockprice underperformance relative to peers and the market over the last eighteenmonths, and the company's persistent market discount relative to its peers andits own intrinsic value.  We believe Crown Castle shares some of these samefrustrations, and we commend management for soliciting input from itsshareholders on this issue as well as the company's activities generally.  Werecently met with management at Crown Castle's headquarters in Houston andhave had several follow-up conversations, continuing the productive dialoguewe have had with the company for several years.  Given the recent publishedspeculation of a potential Verizon towers transaction (including a potentialsale announcement within the next 30-60 days), we felt compelled to reach outpublicly to fellow shareholders at this time as well, to further stimulate thecapital allocation discussion which has intensified among investors andanalysts in recent weeks.We firmly believe Crown Castle's valuation can be improved dramatically andsustainably through a change in the company's capital allocation plan,reducing Crown Castle's cost of capital and enhancing its ability to continueto grow and compound shareholder value over the long term.  Based on ouranalysis, we see a near-term opportunity for Crown Castle to drive a 27%re-rating in its equity, and the potential for over 60% upside in 15 months. Once the company's equity currency has strengthened, Crown Castle canaggressively pursue a Verizon towers transaction, creating even greaterlong-term value for shareholders.  However, if the company does not have theright cost of capital, it should not be pursuing acquisitions or issuingequity, whether for Verizon's towers or any other transaction.We make our case to shareholders and the company below, as well as in theattached presentation.  Our analysis suggests a change in capital allocationcould result in Crown Castle's stock trading for in excess of $100.00 pershare within a short time frame, and compounding further from there.  Based onrecent public commentary by management, we think Crown Castle may beconsidering the same actions we suggest.  Comments from analysts and investorssuggest shareholders would support our recommendations as well.  Given ourconviction in the need for change and the magnitude of the long-term value itcreates for shareholders, we believe it is the responsibility of the companyto embrace change now or provide shareholders with a clear path to a superioralternative."Betwixt and Between"We believe Crown Castle's current capital structure and capital allocationplans taken together are sub-optimal, and that the combination of de-leveringthe balance sheet while maintaining an artificially low payout ratio haspressured the company's valuation and led to Crown Castle trading at adiscount to its peers.  Crown Castle is now "betwixt and between" in our view,having committed to strong dividends at the end of the decade, but leavingbehind an optimal leverage ratio today.  We believe last year's AT&Ttransaction contributed to the problem given the excessive equity funding usedand relatively high price paid.  It is critical that the company avoid asimilar stumble in any potential Verizon transaction.  Regardless of theoutcome of any particular transaction though, we believe Crown Castle mustaddress its capital allocation plan.  In our view, Crown Castle has two clearoptions today: (i) increase its dividend payout ratio significantly, or (ii)increase and maintain a higher leverage ratio.  We summarize these two choicesbelow.  Either way, we firmly believe the status quo is unacceptable.Option #1: Increase Payout Option #2: Increase Status QuoRatio LeverageQuarterly Dividends Ongoing Share Buybacks De-Levering$4.00+ Dividend / Share in $1.60+ Dividend / Share in $1.60+ Dividend / Share2015 2015 in 201580%+ Payout Ratio 30% Payout Ratio 30% Payout Ratio10%+ Long-Term Dividend 15%+ Long-Term Dividend 15%+ Long-Term DividendGrowth Growth GrowthMaintain ~4.5x Leverage Maintain ~7.0x Leverage Maintain ~4.5x LeverageFlex to ~6.0x for M&A Flex to ~7.5x for M&A Flex to ~6.0x for M&ATarget Investment Grade Non-Investment Grade Target Investment GradeRating RatingOrganic Growth and M&A Organic Growth and M&A M&A ChallengedValued on Dividend Yield Valued on AFFO / Share Valued on AFFO / ShareWe believe increasing the company's payout ratio to 80% - 90% of AFFO andpaying a dividend of at least $4.00 per share, or increasing and maintainingleverage of approximately 7.0x net debt / EBITDA and buying back stockregularly to shrink the company's float, will both create significantlong-term value for Crown Castle shareholders and help to restore thecompany's capital allocation halo.  We think increasing the company's payoutratio and targeting an investment grade rating represents a strategy which isconsistent with Crown Castle's business plan and DNA.  We also believe we arein a once-in-a-generation credit environment, with interest rates nearall-time lows and credit terms highly accommodating.  While we cannot becertain, our sense from our meetings and conversations with management hasbeen that Crown Castle would prefer to target being an investment gradecompany with a high payout ratio to re-levering the balance sheet to 7.0x, andtherefore we have focused our analysis on "option one."  We agree withmanagement's decision to focus on the U.S. wireless market and drivingpredictable, attractive risk-adjusted returns for shareholders.  Option one isentirely consistent with this strategy.  Option one also has the benefit ofaligning with Crown Castle's long-term financial model as a REIT.  We believean increase in the company's payout ratio will strengthen Crown Castle'sequity currency, enhance the company's long-term growth prospects, increasemanagement's credibility, and "close the circle" for shareholders.  We believethe "missing link" has been the largest contributor to the company's stockprice underperformance, and the company can and should remedy this issueimmediately.'Option One' StrategyDividend Policy DiscussionTo borrow one of our favorite phrases, we believe that once you know how youwant to live your life, you should start right away.  Given our view ofmanagement's likely preference for option one, we believe Crown Castle shouldimmediately embrace the full payout structure it has publicly stated it willeventually adopt once its net operating losses expire in 2018-2020, ratherthan artificially deferring strong dividends until the end of the decade.  Allthe current plan does is defer shareholder returns and stock performance inour view.  We believe that Crown Castle could conservatively trade at a 4.0%dividend yield based on the multiple sets of comparable companies we outlinein our presentation (and should trade at an even better yield over time). These comparables include other REITs and companies in the telecom and mediaindustries, energy infrastructure companies, utilities, REITs broadly, andother high dividend paying companies in the S&P 500.  As one example,utilities trade at a 4.0% 2015E dividend yield on average, with approximately3% - 4% earnings per share and dividend per share growth.  To be clear, webelieve Crown Castle is significantly undervalued on an absolute basis and notsimply relative to dividend paying companies, and we view a change in thecompany's payout ratio as a catalyst for narrowing this discount andcorrecting its cost of capital.  Assuming the company earns approximately$5.00 per share of AFFO in 2015 (we recognize the company will likely guidemore conservatively on its upcoming earnings call[1]), an 80% payout ratiowould equate to a dividend of approximately $4.00 per share, which based onour analysis translates to a stock price of $100.00 (27% upside) at a 4.0%dividend yield.  We believe Crown Castle should in fact trade closer to a 3.5%dividend yield over time as yield investors gain familiarity with the company,driving even higher long-term upside for shareholders.  Assuming lowdouble-digit dividend growth and a 2016 dividend of approximately $4.50 pershare, a 3.5% dividend yield equates to a stock price of $128.57 in 15 months,or over 60% upside plus dividends received based on our analysis.Moreover, we believe changing Crown Castle's capital allocation strategy wouldenable the company to attract a new class of yield-oriented investors.  Whilethe company and the tower industry have worked hard to try to win over"traditional" REIT investors, we have found that many of these investors havea common checklist of issues which it will be difficult for the company toreasonably satisfy.  Crown Castle (and American Tower) may be too large tojoin benchmark REIT indices without having undue weight in the eyes of certainREIT investors, will likely always suffer from the perceived overhang oftechnology risk, and may not make a sufficient case for alternative uses ofland and hard assets.  In contrast to the demands of REIT investors, thepriorities of yield-oriented investors are simply the stability and growth ofdividends to shareholders.  We believe Crown Castle's combination of long-termpredictability and growth is highly unique and attractive among equitiestoday, and aligns very well with a yield-oriented shareholder base –regardless of whether or not interest rates rise, which they will undoubtedlydo at some point.  Additionally, we believe a byproduct of the change to ahigher payout ratio will also be increased appreciation from traditional REITinvestors, who are accustomed to healthy dividend payments as we show in ourpresentation.We acknowledge there may be different investor preferences for dividend payoutratios along a spectrum of 70% - 90% of AFFO.  A lower payout ratio givesmanagement greater flexibility among alternative capital allocation options(including share repurchases and small cells), while a higher payout ratio ismore likely to maximize value today and drive down the company's cost ofcapital.  A lower payout ratio should result in higher dividend per sharegrowth over time, whereas a higher payout ratio provides higher currentreturns and greater predictability.  As Chief Financial Officer Jay Brownhighlighted at a recent investor conference, all policies along this spectrumof 70% - 90% of AFFO would require Crown Castle to access the capital marketsfor large M&A transactions.  However, a high payout ratio should not impactongoing growth investments and would not rely on the capital markets in ourview.  Note that $150 million of EBITDA growth alone (or only 7% organicgrowth from the company's projected 2014 EBITDA base of $2.1 billion) drives$675 million of discretionary investment capacity at a 4.5x leverage ratio, incomparison to the company's total expected growth capital spending of $550 -$650 million in 2014.  If shareholders support a large M&A transaction, thecompany will have access to the capital markets to do the deal.  If thecompany does not have shareholder support, it is likely because the deal isnot accretive or otherwise attractive, and the company should not be doingit.  This model is the same one many REITs and MLPs use to facilitateattractive inorganic growth opportunities.In our view the key to attracting yield investors is providing a strongdividend, cash flow stability, and credible growth, and we believe a 90%payout ratio optimizes this formula for Crown Castle's business and long-termplans.  While we suspect management may wish to start at a lower payout ratiothan 90% initially, we believe Crown Castle should pay a dividend of at least$4.00 per share in 2015 (an approximately 80% payout ratio) in order toprovide an attractive current yield.  Yield-oriented investors do not givecompanies sufficient credit beyond 10% dividend growth in our experience, andso we would advise against a lower payout ratio with much higher growth or ahalfway solution.  Any half measures will leave the company in no man's landagain, which benefits no one.  At an optimal payout ratio of 90% (or 1.10xCoverage of AFFO), a dividend of $4.50 per share in 2015 (again based on 2015AFFO per share of approximately $5.00) would position Crown Castle as the 8thhighest dividend yield in the S&P 500 at the company's recent stock price.  Adividend of $4.00 per share would place Crown Castle as the 13th highestdividend yield in the S&P 500.  Either way, we would argue this represents asevere valuation disconnect which simply could not persist.  In our view, theother companies on this list generally trade at high dividend yields becausetheir businesses are facing real secular challenges and the market questionsthe ability of these companies to sustainably pay their dividends.  Incontrast, Crown Castle's cash flows represent the re-packaged credit ofAmerica's largest wireless operators – critical network payments which onecould argue should trade even tighter than secured debt.  A sizable dividendbacked by the credit quality of America's largest wireless operators in abusiness with one of the brightest areas of growth within the telecom sectorwould be incredibly well received by yield-oriented investors in our view.Verizon Towers DiscussionTo a certain degree, the Verizon deal is only a small piece of the discussionof the company's long-term capital allocation strategy.  We believe thecompany is faced with two clear choices regardless of a deal.  On the otherhand, the transaction highlights the fact that Crown Castle is betwixt andbetween, trades at a discount, and can't compete cost-effectively for M&Aopportunities.  Furthermore, the AT&T transaction has been an overhang forCrown Castle, and shareholders do not want to see a repeat occurrence one yearlater.  But let's be clear, we want Crown Castle to correct its capitalallocation plan, reduce its cost of capital, and then bid for the Verizontowers.  A Verizon tower deal would diversify Crown Castle's revenues anddeepen the company's relationship with arguably the U.S.'s strongest wirelesscompany and operator of the country's most robust network.  As the largest andmost-focused U.S. tower operator and the largest operator of legacy carrierportfolios, Crown Castle could be the best strategic acquirer of Verizon'stower assets.  That does not mean the company will be best positionedfinancially to provide the highest and best bid though.  By definition, ifCrown Castle does not have a strong equity currency or higher leverage thanpeers, the company should not win any competitive M&A process (unless itaccepts lower returns, which we hope is not the case).We believe a potential Verizon towers sale can serve as a positive catalystfor the company to change its capital allocation plan, leading to a re-ratingof Crown Castle's equity currency and strengthening its ability to compete forM&A opportunities now and in the future.  Based on recent press articles, thepotential sale price for the Verizon towers could be approximately $6.0billion.  Assuming this value is accurate and represents a cash flow multipleof approximately 20.0x, Crown Castle would need to increase its pro-formaleverage to approximately 7.2x net debt / EBITDA in order to complete a fullydebt-financed purchase of Verizon's tower assets.  As discussed above, webelieve increasing leverage to 7.0x and maintaining this leverage level overtime is an attractive capital allocation option for Crown Castle.  However,given management's desire to target an investment grade rating over time, aVerizon transaction will likely require equity, and we believe this meansCrown Castle must increase its payout ratio as well.  Crown Castle shouldincrease its dividend to at least $4.00 per share, and then be prepared toincrease leverage to approximately 6.0x net debt / EBITDA (or higher) for aVerizon deal, with plans to deleverage over time through EBITDA growth totarget an investment grade credit rating.  We believe this capital allocationand capital structure combination should be sufficient to drive a re-rating inCrown Castle's stock such that the company could issue any required equity athigh enough prices (i.e., substantially higher than current prices) to justifycompleting a near-term deal.However, we strongly believe that the company should not issue any equity atrecent prices, and certainly not to acquire more tower assets at premiumprices when Crown Castle continues to trade at a material discount to bothtransaction multiples and publicly traded peers.  It simply does not makesense for the company to issue equity to acquire towers at a ~3 - 4x premiumto Crown Castle's valuation when the company can borrow debt cheaply to buyback its stock (and effectively its own towers) trading at a discount.  Thegood news is this issue has an easy fix as we have outlined.  Additionally, wedo not believe that the company should complete a Verizon transaction byincreasing leverage and then de-levering again with no material change to itspayout ratio.  Increasing leverage becomes a viable capital allocation planonly if the company is willing to maintain leverage at an optimal level andbuy back stock or deploy this capital on an ongoing basis.  We believeshareholders have clearly indicated in the past year that de-levering withoutreturning more cash flow to owners is an unappealing plan.  Management shouldrecognize it would be inconsistent with their long track record as thoughtfulcapital allocators to commit the same error in a transaction with Verizon justone year after the AT&T deal.ConclusionCrown Castle's capital allocation and capital structure plans taken togetherhave left the company betwixt and between; the status quo is not working. Crown Castle has two clear options today: (i) increase its dividend payoutratio significantly, or (ii) increase and maintain a higher leverage ratio. While we cannot be certain, our sense from our meetings and conversations withmanagement is that Crown Castle would prefer the first option, which alsoaligns with the company's long-term financial model as a REIT.  A potentialVerizon towers transaction should serve as an additional catalyst for thecompany to improve its capital allocation plan now.  Given the increasingpublic debate around Crown Castle's capital allocation strategy and thepotential for a Verizon towers transaction in the coming weeks, we feltcompelled to release our thoughts publicly.  In summary, we recommend thefollowing: 1. Pay a dividend of at least $4.00 per share in 2015 2. Guide to 10% or higher dividend per share growth over the next 3+ years 3. Plan to maintain leverage of approximately 4.5x net debt / EBITDA on an ongoing basis and target an investment grade credit rating over time 4. Flex leverage up to 6.0x net debt / EBITDA or higher for future M&A (including the Verizon towers), if the transaction is accretive to the standalone dividend per share plan described above 5. De-lever back to 4.5x following M&A through EBITDA growth (maintain 80%+ payout ratio over time) Crown Castle should embrace the long-term vision it has already shared withthe market: an investment grade U.S. tower REIT with a sizeable, predictable,and growing dividend.  We believe this change will reduce Crown Castle's costof capital and drive significant long-term upside for shareholders.  Onceaccomplished, the company can then move from being on defense to being onoffense, in front of a potential Verizon towers transaction (or any otherattractive inorganic investment).  Given its strong financial condition, CrownCastle will be in a position to both return capital regularly and continue toinvest in or even accelerate growth.  An attractive equity currency bolstersCrown Castle's capacity to pursue M&A, tower improvements, land purchases, andsmall cell builds in all future scenarios.  The company could have access tobillions of dollars of incremental growth capital to the extent it cancredibly be used to accelerate growth and increase dividends and AFFO on a pershare basis.  This model is the way many world class REITs and MLPs use thecapital markets to facilitate extraordinary growth.  We really can have ourcake and eat it, too.To be clear, this is a capital allocation strategy which creates value overthe long term for shareholders, not just through a short-term increase in thestock price.  We believe many shareholders will support this plan, and wethink based on public commentary that management may already be considering itas well.  While we have a high degree of conviction in the need for change andthe value created by the capital allocation plan we have described, we remainopen to any ideas which can be shown to further enhance this plan or crediblydemonstrate superior returns over a similar period of time.  However, the onusis now on the company to embrace change or provide a clear path to a superioralternative.  Taking no action after an extended period of underperformancecould send a signal that Crown Castle is comfortable with its poor performanceand discount to peers, something we do not expect given management's strongreputation and history of value creation. Sincerely,/s/ Keith MeisterKeith MeisterManaging PartnerCorvex Management