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Corvex Management LP, which manages
investment funds that own beneficially or economically approximately 12.6
million shares and share equivalents of Crown Castle International Corp.
("Crown Castle") representing economic exposure of approximately
$1 billion, today released a letter and presentation to Crown Castle
shareholders outlining a proposal to improve the company's capital allocation
strategy to strengthen Crown Castle's valuation, reduce its cost of capital,
and enhance the company's ability to continue to grow and compound shareholder
value.
"Given the increased public debate around Crown Castle's capital allocation
policy as well as the potential for a Verizon towers transaction in the near
future, we feel compelled to share our views publicly," said Keith Meister,
Managing Partner of Corvex. "We believe Crown Castle's valuation can be
improved dramatically and sustainably by changing its capital allocation plan,
expanding the company's investor base and closing its discount to peers and
intrinsic value. We commend management for soliciting input from us and our
fellow shareholders regularly, and we look forward to working together to
create value for all Crown Castle shareholders."
A copy of the presentation can be obtained at CorvexCCIpresentation.com. The
full text of the letter to Crown Castle shareholders follows:
October 14, 2014
712 5^th Avenue, 23^rd Floor
New York, NY 10019
Dear Shareholders of Crown Castle,
Corvex is an investment advisor with a fundamental-based long/short equity
strategy and approximately $7 billion of assets under management. We focus on
investing in high quality, North American businesses in industries with
positive secular tailwinds, and we look for situations where change and
event-specific volatility enable us to buy the securities of strong businesses
at discounts to intrinsic value. We believe in engaging regularly with the
management teams of our portfolio companies with the goal of developing close
long-term relationships underpinned by constructive two-way dialogue. We have
invested in and followed Crown Castle and its tower peers since the inception
of Corvex in 2011. Corvex funds have beneficial or economic ownership of
approximately 12.6 million shares and share equivalents of Crown Castle which
at current market prices represents approximately $1 billion of economic
exposure, making us one of the company's largest investors and the position
one of our largest investments.
We are optimistic that many of you share our view that Crown Castle is a great
business with exceptional growth opportunities in the years ahead. However,
we also believe many of you share our frustration over the company's stock
price underperformance relative to peers and the market over the last eighteen
months, and the company's persistent market discount relative to its peers and
its own intrinsic value. We believe Crown Castle shares some of these same
frustrations, and we commend management for soliciting input from its
shareholders on this issue as well as the company's activities generally. We
recently met with management at Crown Castle's headquarters in Houston and
have had several follow-up conversations, continuing the productive dialogue
we have had with the company for several years. Given the recent published
speculation of a potential Verizon towers transaction (including a potential
sale announcement within the next 30-60 days), we felt compelled to reach out
publicly to fellow shareholders at this time as well, to further stimulate the
capital allocation discussion which has intensified among investors and
analysts in recent weeks.
We firmly believe Crown Castle's valuation can be improved dramatically and
sustainably through a change in the company's capital allocation plan,
reducing Crown Castle's cost of capital and enhancing its ability to continue
to grow and compound shareholder value over the long term. Based on our
analysis, 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 can
aggressively pursue a Verizon towers transaction, creating even greater
long-term value for shareholders. However, if the company does not have the
right cost of capital, it should not be pursuing acquisitions or issuing
equity, whether for Verizon's towers or any other transaction.
We make our case to shareholders and the company below, as well as in the
attached presentation. Our analysis suggests a change in capital allocation
could result in Crown Castle's stock trading for in excess of $100.00 per
share within a short time frame, and compounding further from there. Based on
recent public commentary by management, we think Crown Castle may be
considering the same actions we suggest. Comments from analysts and investors
suggest shareholders would support our recommendations as well. Given our
conviction in the need for change and the magnitude of the long-term value it
creates for shareholders, we believe it is the responsibility of the company
to embrace change now or provide shareholders with a clear path to a superior
alternative.
"Betwixt and Between"
We believe Crown Castle's current capital structure and capital allocation
plans taken together are sub-optimal, and that the combination of de-levering
the balance sheet while maintaining an artificially low payout ratio has
pressured the company's valuation and led to Crown Castle trading at a
discount 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 leaving
behind an optimal leverage ratio today. We believe last year's AT&T
transaction contributed to the problem given the excessive equity funding used
and relatively high price paid. It is critical that the company avoid a
similar stumble in any potential Verizon transaction. Regardless of the
outcome of any particular transaction though, we believe Crown Castle must
address its capital allocation plan. In our view, Crown Castle has two clear
options today: (i) increase its dividend payout ratio significantly, or (ii)
increase and maintain a higher leverage ratio. We summarize these two choices
below. Either way, we firmly believe the status quo is unacceptable.
Option #1: Increase Payout Option #2: Increase Status Quo
Ratio Leverage
Quarterly Dividends Ongoing Share Buybacks De-Levering
$4.00+ Dividend / Share in $1.60+ Dividend / Share in $1.60+ Dividend / Share
2015 2015 in 2015
80%+ Payout Ratio 30% Payout Ratio 30% Payout Ratio
10%+ Long-Term Dividend 15%+ Long-Term Dividend 15%+ Long-Term Dividend
Growth Growth Growth
Maintain ~4.5x Leverage Maintain ~7.0x Leverage Maintain ~4.5x Leverage
Flex to ~6.0x for M&A Flex to ~7.5x for M&A Flex to ~6.0x for M&A
Target Investment Grade Non-Investment Grade Target Investment Grade
Rating Rating
Organic Growth and M&A Organic Growth and M&A M&A Challenged
Valued on Dividend Yield Valued on AFFO / Share Valued on AFFO / Share
We believe increasing the company's payout ratio to 80% - 90% of AFFO and
paying a dividend of at least $4.00 per share, or increasing and maintaining
leverage of approximately 7.0x net debt / EBITDA and buying back stock
regularly to shrink the company's float, will both create significant
long-term value for Crown Castle shareholders and help to restore the
company's capital allocation halo. We think increasing the company's payout
ratio and targeting an investment grade rating represents a strategy which is
consistent with Crown Castle's business plan and DNA. We also believe we are
in a once-in-a-generation credit environment, with interest rates near
all-time lows and credit terms highly accommodating. While we cannot be
certain, our sense from our meetings and conversations with management has
been that Crown Castle would prefer to target being an investment grade
company with a high payout ratio to re-levering the balance sheet to 7.0x, and
therefore we have focused our analysis on "option one." We agree with
management's decision to focus on the U.S. wireless market and driving
predictable, attractive risk-adjusted returns for shareholders. Option one is
entirely consistent with this strategy. Option one also has the benefit of
aligning with Crown Castle's long-term financial model as a REIT. We believe
an increase in the company's payout ratio will strengthen Crown Castle's
equity currency, enhance the company's long-term growth prospects, increase
management's credibility, and "close the circle" for shareholders. We believe
the "missing link" has been the largest contributor to the company's stock
price underperformance, and the company can and should remedy this issue
immediately.
'Option One' Strategy
Dividend Policy Discussion
To borrow one of our favorite phrases, we believe that once you know how you
want to live your life, you should start right away. Given our view of
management's likely preference for option one, we believe Crown Castle should
immediately embrace the full payout structure it has publicly stated it will
eventually adopt once its net operating losses expire in 2018-2020, rather
than artificially deferring strong dividends until the end of the decade. All
the current plan does is defer shareholder returns and stock performance in
our view. We believe that Crown Castle could conservatively trade at a 4.0%
dividend yield based on the multiple sets of comparable companies we outline
in our presentation (and should trade at an even better yield over time).
These comparables include other REITs and companies in the telecom and media
industries, energy infrastructure companies, utilities, REITs broadly, and
other high dividend paying companies in the S&P 500. As one example,
utilities trade at a 4.0% 2015E dividend yield on average, with approximately
3% - 4% earnings per share and dividend per share growth. To be clear, we
believe Crown Castle is significantly undervalued on an absolute basis and not
simply relative to dividend paying companies, and we view a change in the
company's payout ratio as a catalyst for narrowing this discount and
correcting its cost of capital. Assuming the company earns approximately
$5.00 per share of AFFO in 2015 (we recognize the company will likely guide
more conservatively on its upcoming earnings call[1]), an 80% payout ratio
would equate to a dividend of approximately $4.00 per share, which based on
our 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 low
double-digit dividend growth and a 2016 dividend of approximately $4.50 per
share, 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 would
enable the company to attract a new class of yield-oriented investors. While
the company and the tower industry have worked hard to try to win over
"traditional" REIT investors, we have found that many of these investors have
a common checklist of issues which it will be difficult for the company to
reasonably satisfy. Crown Castle (and American Tower) may be too large to
join benchmark REIT indices without having undue weight in the eyes of certain
REIT investors, will likely always suffer from the perceived overhang of
technology risk, and may not make a sufficient case for alternative uses of
land and hard assets. In contrast to the demands of REIT investors, the
priorities of yield-oriented investors are simply the stability and growth of
dividends to shareholders. We believe Crown Castle's combination of long-term
predictability and growth is highly unique and attractive among equities
today, and aligns very well with a yield-oriented shareholder base –
regardless of whether or not interest rates rise, which they will undoubtedly
do at some point. Additionally, we believe a byproduct of the change to a
higher payout ratio will also be increased appreciation from traditional REIT
investors, who are accustomed to healthy dividend payments as we show in our
presentation.
We acknowledge there may be different investor preferences for dividend payout
ratios along a spectrum of 70% - 90% of AFFO. A lower payout ratio gives
management greater flexibility among alternative capital allocation options
(including share repurchases and small cells), while a higher payout ratio is
more likely to maximize value today and drive down the company's cost of
capital. A lower payout ratio should result in higher dividend per share
growth over time, whereas a higher payout ratio provides higher current
returns and greater predictability. As Chief Financial Officer Jay Brown
highlighted at a recent investor conference, all policies along this spectrum
of 70% - 90% of AFFO would require Crown Castle to access the capital markets
for large M&A transactions. However, a high payout ratio should not impact
ongoing growth investments and would not rely on the capital markets in our
view. Note that $150 million of EBITDA growth alone (or only 7% organic
growth 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, in
comparison to the company's total expected growth capital spending of $550 -
$650 million in 2014. If shareholders support a large M&A transaction, the
company will have access to the capital markets to do the deal. If the
company does not have shareholder support, it is likely because the deal is
not accretive or otherwise attractive, and the company should not be doing
it. This model is the same one many REITs and MLPs use to facilitate
attractive inorganic growth opportunities.
In our view the key to attracting yield investors is providing a strong
dividend, cash flow stability, and credible growth, and we believe a 90%
payout ratio optimizes this formula for Crown Castle's business and long-term
plans. While we suspect management may wish to start at a lower payout ratio
than 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 to
provide an attractive current yield. Yield-oriented investors do not give
companies sufficient credit beyond 10% dividend growth in our experience, and
so we would advise against a lower payout ratio with much higher growth or a
halfway solution. Any half measures will leave the company in no man's land
again, which benefits no one. At an optimal payout ratio of 90% (or 1.10x
Coverage of AFFO), a dividend of $4.50 per share in 2015 (again based on 2015
AFFO per share of approximately $5.00) would position Crown Castle as the 8th
highest dividend yield in the S&P 500 at the company's recent stock price. A
dividend of $4.00 per share would place Crown Castle as the 13th highest
dividend yield in the S&P 500. Either way, we would argue this represents a
severe valuation disconnect which simply could not persist. In our view, the
other companies on this list generally trade at high dividend yields because
their businesses are facing real secular challenges and the market questions
the ability of these companies to sustainably pay their dividends. In
contrast, Crown Castle's cash flows represent the re-packaged credit of
America's largest wireless operators – critical network payments which one
could argue should trade even tighter than secured debt. A sizable dividend
backed by the credit quality of America's largest wireless operators in a
business with one of the brightest areas of growth within the telecom sector
would be incredibly well received by yield-oriented investors in our view.
Verizon Towers Discussion
To a certain degree, the Verizon deal is only a small piece of the discussion
of the company's long-term capital allocation strategy. We believe the
company is faced with two clear choices regardless of a deal. On the other
hand, the transaction highlights the fact that Crown Castle is betwixt and
between, trades at a discount, and can't compete cost-effectively for M&A
opportunities. Furthermore, the AT&T transaction has been an overhang for
Crown Castle, and shareholders do not want to see a repeat occurrence one year
later. But let's be clear, we want Crown Castle to correct its capital
allocation plan, reduce its cost of capital, and then bid for the Verizon
towers. A Verizon tower deal would diversify Crown Castle's revenues and
deepen the company's relationship with arguably the U.S.'s strongest wireless
company and operator of the country's most robust network. As the largest and
most-focused U.S. tower operator and the largest operator of legacy carrier
portfolios, Crown Castle could be the best strategic acquirer of Verizon's
tower assets. That does not mean the company will be best positioned
financially to provide the highest and best bid though. By definition, if
Crown Castle does not have a strong equity currency or higher leverage than
peers, the company should not win any competitive M&A process (unless it
accepts lower returns, which we hope is not the case).
We believe a potential Verizon towers sale can serve as a positive catalyst
for the company to change its capital allocation plan, leading to a re-rating
of Crown Castle's equity currency and strengthening its ability to compete for
M&A opportunities now and in the future. Based on recent press articles, the
potential sale price for the Verizon towers could be approximately $6.0
billion. Assuming this value is accurate and represents a cash flow multiple
of approximately 20.0x, Crown Castle would need to increase its pro-forma
leverage to approximately 7.2x net debt / EBITDA in order to complete a fully
debt-financed purchase of Verizon's tower assets. As discussed above, we
believe increasing leverage to 7.0x and maintaining this leverage level over
time is an attractive capital allocation option for Crown Castle. However,
given management's desire to target an investment grade rating over time, a
Verizon transaction will likely require equity, and we believe this means
Crown Castle must increase its payout ratio as well. Crown Castle should
increase its dividend to at least $4.00 per share, and then be prepared to
increase leverage to approximately 6.0x net debt / EBITDA (or higher) for a
Verizon deal, with plans to deleverage over time through EBITDA growth to
target an investment grade credit rating. We believe this capital allocation
and capital structure combination should be sufficient to drive a re-rating in
Crown Castle's stock such that the company could issue any required equity at
high enough prices (i.e., substantially higher than current prices) to justify
completing a near-term deal.
However, we strongly believe that the company should not issue any equity at
recent prices, and certainly not to acquire more tower assets at premium
prices when Crown Castle continues to trade at a material discount to both
transaction multiples and publicly traded peers. It simply does not make
sense for the company to issue equity to acquire towers at a ~3 - 4x premium
to Crown Castle's valuation when the company can borrow debt cheaply to buy
back its stock (and effectively its own towers) trading at a discount. The
good news is this issue has an easy fix as we have outlined. Additionally, we
do not believe that the company should complete a Verizon transaction by
increasing leverage and then de-levering again with no material change to its
payout ratio. Increasing leverage becomes a viable capital allocation plan
only if the company is willing to maintain leverage at an optimal level and
buy back stock or deploy this capital on an ongoing basis. We believe
shareholders have clearly indicated in the past year that de-levering without
returning more cash flow to owners is an unappealing plan. Management should
recognize it would be inconsistent with their long track record as thoughtful
capital allocators to commit the same error in a transaction with Verizon just
one year after the AT&T deal.
Conclusion
Crown Castle's capital allocation and capital structure plans taken together
have left the company betwixt and between; the status quo is not working.
Crown Castle has two clear options today: (i) increase its dividend payout
ratio significantly, or (ii) increase and maintain a higher leverage ratio.
While we cannot be certain, our sense from our meetings and conversations with
management is that Crown Castle would prefer the first option, which also
aligns with the company's long-term financial model as a REIT. A potential
Verizon towers transaction should serve as an additional catalyst for the
company to improve its capital allocation plan now. Given the increasing
public debate around Crown Castle's capital allocation strategy and the
potential for a Verizon towers transaction in the coming weeks, we felt
compelled to release our thoughts publicly. In summary, we recommend the
following:
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 with
the market: an investment grade U.S. tower REIT with a sizeable, predictable,
and growing dividend. We believe this change will reduce Crown Castle's cost
of capital and drive significant long-term upside for shareholders. Once
accomplished, the company can then move from being on defense to being on
offense, in front of a potential Verizon towers transaction (or any other
attractive inorganic investment). Given its strong financial condition, Crown
Castle will be in a position to both return capital regularly and continue to
invest in or even accelerate growth. An attractive equity currency bolsters
Crown Castle's capacity to pursue M&A, tower improvements, land purchases, and
small cell builds in all future scenarios. The company could have access to
billions of dollars of incremental growth capital to the extent it can
credibly be used to accelerate growth and increase dividends and AFFO on a per
share basis. This model is the way many world class REITs and MLPs use the
capital markets to facilitate extraordinary growth. We really can have our
cake and eat it, too.
To be clear, this is a capital allocation strategy which creates value over
the long term for shareholders, not just through a short-term increase in the
stock price. We believe many shareholders will support this plan, and we
think based on public commentary that management may already be considering it
as well. While we have a high degree of conviction in the need for change and
the value created by the capital allocation plan we have described, we remain
open to any ideas which can be shown to further enhance this plan or credibly
demonstrate superior returns over a similar period of time. However, the onus
is now on the company to embrace change or provide a clear path to a superior
alternative. Taking no action after an extended period of underperformance
could send a signal that Crown Castle is comfortable with its poor performance
and discount to peers, something we do not expect given management's strong
reputation and history of value creation.
Sincerely,
/s/ Keith Meister
Keith Meister
Managing Partner
Corvex Management
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