Lumen Big Picture
Well I’ve been doing some thinking over the last few days after the earnings call and what the next steps look like going forward. After rough napkin math and projections I have to say IMO things are looking MUCH brighter and perhaps I see the plan the board and management is anticipating. I’m sure my thesis will have some holes in it but here’s a birdseye view/thought process. I’m getting more excited at what’s rounding into shape and where the company is potentially headed…
Jeff Storey Q3 2022 Call:
Over the last five years, we have significantly improved our balance sheet, eliminating more than $16 billion in debt, and reducing annual cash interest expense by more than $1 billion, and extended most maturities to 2026 and beyond. That said, we do not favor using long-term leverage as a principal source for growth capital.
-Aka, Debt has come down and no more capital will be needed to be raised, the debt is not going to go up from here…which currently sits at $21.8 billion.
EMEA business to Colt for $1.8 billion. This represents a very attractive multiple of approximately 11 times for Lumen's EMEA business and would create additional value for our shareholders.
-More cash on the horizon even though it may take 365 days from now or longer to close the deal, proves further our assets are worth much more multiples than what the stock is trading at today.
“With divestitures of the ILEC business in 20 states, serving mostly rural customers, the divestiture of the LATAM business, today's EMEA announcement, and the divestiture of our legacy colo business, we've been consistently optimizing our assets to focus on the opportunities in which we have the ability to invest, grow and be a market leader. We expect to continue to optimize, focus and align our asset base with our growth opportunities. These value-accretive transactions, together with the capital allocation changes we are making today, provides the company significant flexibility to invest in new growth opportunities, maintain a strong balance sheet and execute on our share repurchase program. We are at a turning point in Lumen's history, where data and AI will transform society and business.”
-The worst company assets are gone in the ILEC 20 state deal. The divi is cut freeing up leverage issues and constant scrutiny. Buy backs are on the table which could slim the float down 15-20%+ putting the # well under 1 billion shares outstanding. As mentioned before on numerous earnings, the 4th revolutions is still in the works but Lumen fiber/edge is already in place and ready to go to work when needed.
August 2021 press release:
“Apollo is acquiring Lumen’s CenturyLink footprint in the Midwest and southeastern U.S. (except Florida), including its local fiber and copper network assets, broadband and voice customers served by those holdings, connectivity to tower sites and central offices. All told, Lumen is handing over 200,000 fiber-enabled units and 7 million addressable locations.”
“The operator plans to retain ILEC operations in 16 states in the western part of the country, spanning 2.4 million fiber-enabled units and 21 million addressable locations. It will also keep control of its non-local exchange fiber assets in the 20 states where it’s selling assets to Apollo, including its long-haul fiber and enterprise CLEC holdings, Storey said.”
“On the whole, our retained markets have significantly higher fiber penetration, population density, enterprise demand and overall growth opportunities than the transferred assets,” Storey said, noting 70% of the addressable locations in the 16 remaining markets are in urban and suburban areas.”
Q3 2022 Earnings Call:
“During the quarter, total enablement’s were approximately 210,000, with approximately 195,000 of those enabled locations in our 16 routine states, bringing the total enabled locations in the retained states to 3 million as of September 30”
-This is where the math starts to get really interesting. The 16 states sold to Apollo had addressable market of 7 million (vastly in costlier rural areas) and had a measly 200,000 fiber connections…this deal went for $7.5 billion.
On the flip side the remaining 16 states are in a much more dense market in growing cities like Seattle, Minneapolis, hell the state of FL (70% in urban/suburbs), this represents an addressable market of 21 million, which is 3 times more than Apollo deal. The fiber connected and currently enabled in these 16 states is 3 million, that’s 15x what the Apollo deal had!
What is this worth if Lumen shopped this remaining 16 state footprint? All day long you’d have to say it’s at least 2x more valuable than the Appollo weak ILEC assets. I’d argue that 2.5 to 3x is absolutely attainable. Dollar wise- 2x gets it done for $15 billion….2.5x $18.75 billion…3x $22.5 billion. All of course this is pre-tax and other costs but let me remind everyone as I mentioned earlier current debt is $21.8 billion.
*$1.8 from Europe deal still on the horizon.
Meanwhile IMO Lumen continues to chug along building out FTTH, whether we continue to add 750k-1,000,000 new addressable locations each year, or that gets to 1.5-2 million a year, to me doesn’t really matter. In fact I don’t believe LUMN needs to push this capex very hard or wants to.
It’s my belief that Management and the board has no desire to be in the mass market/quantum fiber to the home. It’s too costly, takes many years and since this merger it has been the goal to slim up the company and look more like Level 3 and less and less like original CTL. Storey and Stansbury have repeatedly mentioned that they are willing to look at all ways to unlock value and I think this happens via a massive sale. In the meantime biz as usually, don’t break the bank adding FTTH but continue the window dressing for a future buyer to take over.
Next week Kate comes in and focuses her expertise which would be enterprise and government. We want to be a growth company, well let’s get out of the ILEC side and sell to a Comcast, a PE firm whomever wishes to be in that business. Lumens strength is in the fat backbone fiber and edge computing (which is already built out). When do we start seeing meaningful revenue in those departments? Hard to say when the 4th Industrial revolution kicks in… 2-3 years has been mentioned as of late from Management…I know I know we’ve been told timelines before that haven’t come to fruition… but we are getting closer to that inflection point as every month goes by.
Lastly with our big debt due in 2027 leads me to believe we have a 4 year runway to make this happen. It could honestly be a perfect storm in the next 2-3 years as interest rates stabilize/come down and a buyer comes forward. If this company gets the multiple on the remaining 16 states I believe it can get, we’d be close or possibly debt free. I highly doubt with buy backs, small to no debt and IOT, Edge, 5G kicking in we’ll be trading at $6 a share. Also would our friends at T-mobile be able to pull the trigger on buying the remaining (very lean) company comprised of imperative fiber assets Lumen?
Well that’s all this small fish has to say on a Saturday, would love to hear some feedback.