Recently, Lumen Technologies' (NYSE:LUMN) management indicated a strong interest in consummating strategic asset sales to accelerate its debt reduction efforts. Earlier this month, a Bloomberg report indicated that Lumen was negotiating the possible sale of a significant part of its domestic consumer operations to Apollo Global for upwards of $5 billion.

On Monday, Lumen did announce a big asset sale agreement. However, it wasn't the asset sale most investors were expecting. Let's take a look.

Separating the Latin America business

Alternative investment firm Stonepeak has agreed to buy Lumen's Latin American business for $2.7 billion. Australia's largest pension fund will also participate in the investment. Today, Lumen's footprint in the region includes subsea and terrestrial fiber as well as a network of data centers.

Two technicians looking at a tablet in a server room.

Image source: Getty Images.

Lumen will maintain a strategic relationship with the Latin America operations it is selling. The two companies will work together to serve joint customers.

Management says the sale price equates to nine times the Latin American business' estimated 2020 adjusted EBITDA. (That implies the unit generated adjusted EBITDA of about $300 million last year.) Lumen expects to close the deal in the first half of 2022, after receiving necessary regulatory approvals and meeting other conditions.

A decent valuation

This week's news had virtually no impact on Lumen Technologies stock. Lumen shares ended the day on Wednesday virtually unchanged from where they stood at the end of last week. Indeed, the deal announcement contained fodder for both bulls and bears.

On the bright side, a valuation of nine times adjusted EBITDA represents a huge premium to the current market value of Lumen Technologies' entire business. Lumen ended the first quarter with $31 billion of net debt, and it has a market cap just shy of $14 billion. That puts its enterprise value at $45 billion: approximately 5.3 times its projected full-year adjusted EBITDA of $8.4 billion to $8.6 billion.

On the other hand, in a 2020 presentation arguing that Lumen stock was undervalued, management estimated that income associated with fiber assets should be valued at 10 to 12 times adjusted EBITDA. The company's willingness to sell fiber assets at nine times adjusted EBITDA casts doubt on that valuation analysis.

A company presentation slide showing an estimated fair value for Lumen stock between $24 and $35.

Image source: CenturyLink/Lumen June 2020 investor presentation (slide 18).

That said, the majority of Lumen's fiber assets are located in and between North America and Europe. Between those regions' stronger economies and higher construction costs, it seems appropriate to value Lumen's infrastructure there at a premium to its assets in Latin America. Moreover, if the company's fiber-based income streams were valued at nine times EBITDA but the rest of management's valuation assumptions remained intact, Lumen stock would still be dramatically undervalued at its current price.

A good opportunity to accelerate debt reduction

Lumen has about $2.6 billion of debt maturing over the next 12 months. It also has $1.6 billion of high-cost debt that can be called (repaid early) during that period.

Between its internally generated cash flow and the proceeds from selling the Latin America business -- assuming it closes on schedule -- Lumen should be able to repay all of this debt rather than refinancing it. Even without any additional asset sales, that would likely get the company to the high end of its leverage target. (In 2019, Lumen set a goal of reducing debt to between 2.75 and 3.25 times adjusted EBITDA.)

Once it reaches its leverage target, Lumen will probably start using some of its substantial free cash flow for share buybacks. That would accelerate its earnings-per-share growth, potentially leading to a higher valuation. The company could also consider raising its dividend, which already yields nearly 8%.

Selling Latin American fiber assets won't address Lumen's declining revenue trend, unlike the domestic asset sales the company has been investigating. However, selling its Latin American business will enable Lumen to finish fixing its balance sheet quickly. That makes this deal a good move for shareholders that should support further recovery in Lumen's share price over the next few years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.