Crown Castle under scrutiny as Fitch places it on Negative Watch

Investing.com -- Fitch Ratings has put Crown Castle Inc.’s (NYSE:CCI) ’BBB+’ Long Term Issuer Default Rating (IDR) and all ’BBB+’ unsecured ratings on Rating Watch Negative (RWN). This action is a result of CCI’s plan to sell its fiber business in a $8.5 billion transaction to Zayo Group Holdings Inc. and EQT (ST:EQTAB) Active Core Infrastructure fund, following a 15-month strategic review. Fitch anticipates that this move will increase leverage and lead to a more aggressive financial policy post transaction, which could likely trigger a downgrade.

The resolution of the transaction, which is not expected to close until the first half of 2026, may take six months or more. Fitch will finalize the Rating Watch once the transaction is closed.

The sale of the fiber business will reduce CCI’s revenue diversification and significantly decrease its scale. The fiber segment, including CCI’s fiber and small cell operations, makes up about a third of the company’s total revenue and 26% of operation profit. CCI plans to use a substantial portion of the sale proceeds to repay debt and for share buybacks.

Fitch perceives that CCI’s more aggressive stance toward shareholder returns increases credit risk in the near term. Based on the company’s updated leverage target, Fitch expects that ratings will be downgraded by one notch to ’BBB’ after the transaction closes. CCI aims to maintain an investment grade credit profile with a target leverage of 6.0x-6.5x post transaction.

CCI has also announced a reduction in its annual dividends by approximately 32% to $4.25 per share starting in the second quarter of 2025. The company has also announced a $3 billion share buyback program to be initiated after the close of the transaction. CCI intends to set its annualized dividend at approximately 75% to 80% of AFFO excluding amortization of prepaid rent.

While the proposed sale will transform CCI into a towers-only business, losing revenue diversification from fiber and small cells, the company will benefit from higher EBITDA margins, as towers are a higher margin business than fiber. Fitch expects significantly improved financial flexibility due to elimination of over $1 billion in high fiber-related capex and reduction in dividends.

CCI’s tower revenue is highly predictable due to long-term lease contracts with contractual escalators. The tower industry benefits from wireless carriers’ continued investments in 5G networks to meet growing demand for mobile broadband services. Fitch believes the wireless industry’s need for increased broadband network capacity will continue to grow over the coming years, driving demand for digital infrastructure, along with CCI’s revenue and cash flow growth.

CCI’s ratings reflect the strong recurring cash flows generated from its leasing operations, robust EBITDA margins and the scale of its tower portfolio. A focus on the U.S. market reduces operating risk. The tower business model provides considerable stability to operating performance and FCF growth. These characteristics lead to a lower business risk profile for CCI than for most typical corporate credits.

The expected revenue impact from the April 2020 merger of T-Mobile and Sprint is approximately $205 million in 2025. due to reduced site rental revenues from tower non-renewals. After 2025, the company stated that any impact from Sprint cancellations should fall within 1% to 2% of churn rates. Fitch believes revenue growth from continued leasing activity, contractual escalators and regulatory commitments regarding T-Mobile and DISH Network (NASDAQ:DISH) will offset the modest losses caused by Sprint churn.

The U.S. wireless communications tower industry is dominated by two major competitors: American Tower (NYSE:AMT) Corporation (BBB+/Stable) and CCI, which focuses nearly all of its operations on the U.S. market via tower site rental revenue and historically fiber/small cell revenue. In contrast, AMT has some emerging market exposure; however, this was reduced by acquiring Telxius Telecom (BCBA:TECO2m) in 2021, which primarily operates in Europe, and CoreSite Realty Corporation, a data center operator.

AMT has lower financial leverage profile than CCI. Fitch expects AMT to maintain leverage near 5x going forward. Fitch expects CCI’s leverage to remain in 6x-6.5x post transaction close.

SBA Communications Corp (NASDAQ:SBAC). also has a sizable share of the market with some exposure to emerging markets. Cellnex Telecom (BME:CLNX) S.A. (BBB-/Stable), Europe’s leading tower operator, is rated lower than its U.S.-based peers, AMT and CCI, reflecting its higher leverage (over 7x). The U.S. tower companies have more customers per tower, higher scale as measured by revenue, and stronger EBITDA margins.

Tower operating businesses have high operating leverage, leading to consistent profitability and strong FCF. This is due to the small incremental cost associated with adding tenants to a tower, especially compared with large incremental EBITDA margin growth resulting from such additions. The tower industry employs a stable business model and experiences much lower business risk than many business models within the telecommunication segment, which results from several factors, including long-term contracts, a stable pricing model, predictable expenses, low technology risk and long-term growth opportunities.

Fitch’s key assumptions include 2025 revenue (including fiber business) near $6.3 billion largely due to one-time impact from Sprint churn ($205 million) and non-cash items. Fitch has assumed the sale of fiber business transaction close of July 01, 2026. Post close, Fitch expects towers business revenue to grow in low to mid-single digits. EBITDA margins are expected to increase from low 60s to high 60s over the forecast as the business becomes towers-only. Towers segment has higher EBITDA margins than fiber segment. Capex is expected to reduce significantly post transaction close as fiber related heavy capex goes away. Fitch expects towers related capex to be in $250 million-$300 million range. Dividends are expected to decline to approximately $2.1 billion in 2025 reflecting reduction in dividend per share to $4.25 starting 2Q25. Share repurchases of $3 billion post transaction close. Fitch has assumed share buybacks of $1 billion and $1.5 billion in 2026 and 2027.

Fitch expects to resolve the RWN and downgrade the IDR to ’BBB’ once the announced fiber sale transaction closes. Factors that could lead to negative rating action or downgrade include capital allocation policies such as share repurchases and leveraging transactions that result in expectations for EBITDA net leverage sustained above 5.5x, and a slowdown or flattening of organic revenue growth combined with margin pressure. Fitch does not anticipate an upgrade in the near term given the company’s updated financial policy with a target net leverage of 6.0x-6.5x.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.