Telecommunication stocks saw a notable downturn last week amid uncertainty brought on by an investigative journalism exposé published by the Wall Street Journal (WSJ) that shed light on a lead contamination issue involving at least 2,000 copper cables spread across the U.S.
These cables, dating back to the 1800s through 1960, are encased in lead and have been found to be degrading, which the WSJ claimed is contaminating the ground, soil and water with lead toxicity.
The subsequent underperformance by telco companies included Frontier down 12%, Lumen down 10%, Uniti down 7%, Consolidated Communications Holdings down 7%, AT&T down nearly 7% (their lowest level in three decades) and Verizon down 2%, TD Cowen reported, as the industry scrambles to figure out what a remediation process might look like moving forward.
TD Cowen said the financial implications of the WSJ report remain uncertain, with potential liabilities ranging from near-zero to tens-of-billions of dollars.
But even with the outcome stemming from the WSJ article "too early to size," TD Cowen said that the situation calls for a prolonged process that could significantly impact incumbent local exchange carriers (ILECs) seeking to raise capital, including Frontier, Lumen and Consolidated Communications Holdings.
For example, some M&A deals might be up in the air now, including Searchlight's $4 per share offer for Consolidated Communications Holdings.
TD Cowen suggested the implications could also affect companies' access to debt markets, with stocks like Frontier facing uncertainty as they plan to raise debt this summer.
New Street Research said in a public note that since the WSJ investigation broke, its clients have been concerned over whether Frontier is still a compelling investment, and the impact it will have on the company’s ability to raise new debt in the asset-backed securities (ABS) market.
The research group estimated lead remediation costs could reach $6.2 billion for Frontier, with potential costs varying depending on fiber and copper markets.
Even in a worst-case scenario, New Street Research believes the stock is still worth $75 and said despite the investigation, Frontier is expected to raise $2 billion or more in the ABS market by including only fiber assets with no lead risk in their securitization pool or reserving a portion until the lead issue is resolved.
The lead issue might impact the investment plans of tower companies, particularly AT&T’s and Verizon's 5G capex spend, TD Cowen added.
Telcos have been facing scrutiny regarding the extent of lead contamination, with some denying its severity. In response to the WSJ article, US Telecom issued a statement and set up a website defending the industry's safety record and presenting arguments that could potentially deny any environmental infractions.
"We have been unable to confirm the information reported by the Wall Street Journal because we do not have access to all of the data or methodology underlying its conclusions," US Telecom said in a statement. "We have not seen, nor have regulators identified, evidence that legacy lead-sheathed telecom cables are a leading cause of lead exposure or the cause of a public health issue."
A US Telecom rep told Fierce that the "telecommunications industry stands ready to engage constructively on this issue."
But the rep added that many considerations go into determining whether legacy lead-sheathed telecom cables should be removed or should be left in place, including "those regarding the safety of workers who must handle the cables, potential impacts on the environment, the age and composition of the cables, their geographic location and customer needs as well as the needs of the business and infrastructure demands."
Still, environmental groups are underlining the gravity of lead contamination as many of the cable sites affected are situated in residential and commercial areas, with some even found in schoolyards. Independent tests financed by the WSJ revealed lead levels in sediment and soil that exceeded the U.S. Environmental Protection Agency's (EPA) threshold for areas where children play, in some cases measuring up to 14.5 times the acceptable limit.
Environmental Defense Fund (EDF), Below the Blue, and Clean Water Action submitted a letter to the EPA today, calling on the agency to investigate the uncontrolled release of lead by the telecom cables. The groups claim that more than 300 of these cables are posing a threat to community drinking water sources.
“EPA must prioritize the immediate removal of lead-sheathed cables accessible to children or strung overhead between telephone poles,” said Tom Neltner, senior director for safer chemicals at EDF. “These cables pose the greatest exposure risk to lead, and they can be easily fixed. For the underwater cables, EPA should assess the risk, prioritizing those in sources of water protected for drinking.”
The groups maintained that without EPA intervention, they expect that the risk posed by the cables will increase as they deteriorate further and release lead into the environment.
"We have personally visited over 300 sites with lead-sheathed cables in communities across America,” said Seth Jones, co-founder of Below the Blue and President of MTS. “Research suggests that there are potentially thousands of other abandoned cables across the country. Given the number of cables identified across nine states, this is not a situation that can be addressed locally. We all need to know how big a problem this truly is for our country."
While the extent of lead-encased cables in use is yet to be determined, TD Cowen expects that a prolonged process will include telcos self-auditing, political debates and potential lawsuits. The eventual outcome could be influenced by various factors, among them who takes over the White House in January 2025, which the analyst group said “will naturally be of importance.”
Nonetheless, TD Cowen noted that telcos' “weight and stature,” along with their national significance as employers and service providers, will likely prevent regulators from forcing them into bankruptcy.
7/18/23: This article was updated with additional comment from US Telecom.