Lumen Technologies this week agreed to sell ILEC assets in 20 states to investment firm Apollo Global Management for $7.5 billion, striking its second major divestiture deal in as many months after offloading its Latin America business for $2.7 billion. The operator pitched the former move as a positive, arguing it would allow the company to accelerate investments in fiber deployments in its remaining footprint. But analysts warned the deals aren’t all good news for Lumen.
First, MoffettNathanson stated the transactions will make Lumen even more heavily dependent on the business segment than it already was, with more than 80% of revenue coming from this unit after the deals close. MoffettNathanson noted the operator’s segment revenue declined 4.9% in Q2. Though Lumen executives said they were hopeful for an improvement in business market trends, MoffetNathanson analysts pointed out both AT&T and Verizon also posted declines in the segment, with the latter forecasting extended weakness.
Much of the downside of the Apollo deal also stems from Lumen’s status as a publicly traded company beholden to the expectations of investors.
Analysts at Raymond James put it bluntly, stating Lumen “has about 12-18 months to convince investors that the move to a heavy investment for broadband combined with the continued exposure to the declining enterprise business is worth an expanded multiple.” They added “we have been strong advocates for the upgrade of copper to fiber, but the revenue and FCF trajectory as this progresses is not as well suited for public companies.”
MoffettNathanson also warned Lumen’s planned investments in fiber-to-the-home, combined with expected tax pressure, will likely “necessitate a dividend cut.”
Meanwhile, New Street Research analysts argued Lumen handed Apollo a prime value creation opportunity. “Assuming Apollo upgrades just over 4MM homes to fiber, they would create just over $6BN of value,” they wrote, adding Lumen “should have cut the dividend and invested for long term value rather than sell.”
They noted, however, Lumen still has the potential to create $20 billion in value of its own by upgrading 13 million lines in its remaining copper footprint to fiber. “The fiber asset they have in the end would be worth $43BN (13MM new lines plus 2.4MM existing fiber lines at $3,900 per line),” they concluded.