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Crown Castle won't sell fiber biz to appease Elliott – analysts

Activist hedge fund Elliott Management wants Crown Castle to sell the fiber business that it spent $11 billion building.

But some Wall Street analysts don't believe Crown Castle will do it.

"We're not convinced Crown Castle could sell its fiber assets for a meaningful premium," wrote the Wall Street analysts at Wells Fargo in a recent note to investors. The analysts argued that there are few potential buyers that could meet the 16x multiple Crown Castle would need for a sale to make sense.

Anything less "would effectively signal to its investors that it had overpaid for its fiber assets," they added.

The Wall Street analysts at Deutsche Bank Securities agreed that it's "unlikely" Crown Castle will opt to sell its fiber business.

Crown Castle's fiber operation is "a complementary offering meeting the network densification needs of its top carrier customers as the US heads into a 5G world," the Deutsche Bank Securities analysts wrote in a recent note to investors. "Given this, and the lack of significant upside (that we see, at least) if Crown Castle were to sell/spin off this business, we view this as a far less likely scenario."

The issue caps weeks of back-and-forth between Elliott Management and Crown Castle.

The Elliott investors opened their attack in July by publicly arguing for several changes at Crown, including a "refocus" on fiber to raise its rate of return to 40%, as well as overhauling Crown's "extraordinarily long-tenured board."

Crown Castle subsequently responded with a number of changes, including new financial disclosures and new corporate governance guidelines. Importantly, the company also announced that its top fiber executive, Jim Young, would retire and that it would look both internally and externally for his replacement.

None of that has sat well with the investors at Elliott Management, who own roughly $1 billion in Crown shares.

"We believe it is imperative that Crown Castle begin an immediate operational and strategic review of the [fiber] business and subsequently outline the best path to maximize value and position Crown Castle to finally fulfill its significant potential," Elliott Management wrote in its latest letter to Crown Castle on Monday. "We look forward to continued engagement with the company."

At the heart of the battle is Crown Castle's small cell strategy, which uses the company's fiber network for backhaul. Crown Castle is betting that US wireless network operators will eventually incorporate hundreds of thousands of small cells into their networks. The Elliott investors don't want to wait for that potential opportunity to play out.

Ultimately, the analysts at Wells Fargo expect Crown Castle to stand its ground, but warned that the situation will likely create turmoil among the company's shareholdings. "We also do not believe Crown Castle management will pursue significant strategy changes in the near-term despite pressure from activist Elliott, who could be a disruptive force among Crown Castle shareholders," they noted.

Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano

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