Lumen is one of the last, big telco providers with legacy DSL copper plant in the United States. On earnings calls, it’s evident that Lumen is faced with a choice: either increase fiber-to-the-home (FTTH) passings to meet modern customer demand for high-speed internet; or unload its legacy DSL/fiber business, entirely.
The analysts at MoffettNathanson this week penned a research report, teasing out all the variables in Lumen’s dilemma. It’s complicated. But from their perspective in terms of shareholder value, they think Lumen is better off pushing FTTH upgrades, rather than selling its mass markets business.
Of the possibility of selling off its DSL/copper business, the analysts wrote, “Lumen’s ILEC assets could be appealing to infrastructure investors willing to roll up their sleeves and embark on these upgrades, and they may represent the last sizable portfolio of such assets that are likely to be sold.”
Of its ILEC footprint of about 23 million homes passed, only about 10% of it is FTTH-enabled. But there are potentially buyers who would want to acquire this footprint, based on some recent acquisitions.
“There’s been a meaningful uptick in interest in FTTH opportunities, including copper to fiber fixer uppers, especially over the past year,” wrote Moffett. It cited WaveDivision’s and Searchlight’s acquisition of Frontier’s Pacific Northwest properties. Searchlight also invested in Consolidated Communications to help fund its FTTH rollout. And Macquarie acquired Cincinnati Bell.
However, challenges to executing a sale would include negotiating a satisfactory price; untangling the intertwined state of Lumen’s networks; and the mass markets segment’s disproportionate contribution to Lumen’s cash flow. And while disposing of the mass markets business would yield value now, it would be at the expense of ongoing cash flow for the future.
Even though consumers don’t want DSL, and the technology is in decline, it still generates a decent amount of Lumen’s revenue, and it has good margins. But these customers could be converted to fiber.
MoffettNathanson sees FTTH investments as the most viable avenue for Lumen to improve its performance and create value for shareholders. “We believe Lumen can achieve appealing returns via heightened organic investment but could struggle to ramp builds to a level that would move the needle given leverage and cash flow constraints.”
Lumen has been upgrading about 400,000 (less than 2%) of its passings to fiber annually over the past couple of years. It now passes 2.4 million locations with fiber. The company plans to launch its Quantum Fiber across all its U.S. markets during 2021.
At its recent investor day, Maxine Moreau, president of Mass Markets at Lumen, said, “Within Mass Markets, the primary driver is Quantum Fiber. Consumers and small businesses require reliable broadband. Quantum Fiber can deliver that.” She touted Quantum Fiber's symmetrical speeds compared to cable’s asymmetrical speeds in which “upload speeds are often far slower,” she said.
Meanwhile, Lumen’s competitor Frontier Communications emerged from bankruptcy in April, and it’s forging ahead aggressively with new fiber deployments.
Frontier’s new Executive Chairman John Stratton said, “Strategically, we’re most focused on the expansion of our fiber network with our initial emphasis on building over 3 million new fiber passings in the very near term. We believe that Frontier has the foundation to become the largest U.S. pure-play fiber provider.”
“We were surprised at how attractive the math of FTTH upgrades could be when performing work related to our Frontier initiation, at least for certain tranches of homes,” wrote the MoffettNathanson analysts.