Lumen Technologies (LUMN -0.38%) announced last August that it would be selling some of its assets in an eye-popping $7.5 billion deal, set to close later this year. What does this mean for investors and should they be worried about this asset sale? In this segment of Backstage Pass, recorded on Dec. 17, 2021, Fool contributor Jason Hall talks about the deal with fellow contributors Toby Bordelon, Lou Whiteman, and Rachel Warren.
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Toby Bordelon: Let's have Jason come on and tell us about a deal we haven't talked about on this show yet, so let's give this quick couple of minutes on this Jason, Lumen, right?
Jason Hall: Yeah. I'm going to go back in time here and we're not going to call the company Lumen. We're going to all it, oh goodness gracious help me out here was it? Help me out, Lou, what was it called?
Lou Whiteman: Wait, this is level?
Hall: CenturyLink, it just fell out of my head, so CenturyLink. This is a company, we go back to 2010 and we had a nice little run, the stock was going up and then steadily fell down.
This is a company that steadily was cutting its dividend and what was happening? The short version is this, CenturyLink was this legacy old copper wire line telephone provider.
Local telephones and local internet, and broadband, but not the good broadband, the crappy broadband that you had to have, it was like DSL and it just wasn't very good. It became a dividend trap.
Company kept having to cut the payout, it was this idea that they were going to get everything where it needed to be, and then there was a transformative acquisition and merger that happened.
They merged with Level 3 Communications and got this enterprise data services like real fiber business that they bought. They started merging those two businesses together. Guess what they kept doing?
They kept cutting the dividend and it just was not playing well. Then something happened along the way. What happened was they finally got to the point where the growth in the new businesses were staving off the losses in the other business. Recently they struck a deal with Apollo. Apollo is one of the big, I think it's publicly traded? It is a publicly traded like private equity business.
Bordelon: The management company is publicly traded.
Hall: They acquire assets and they're really good at like finding assets that they can buy at what they think is a reasonable value that have predictable cash flows like, that's part of their secret sauce. They decided that it made sense to spend $7.5 billion to buy the operations in the orange states that are basically like those local telecommunications businesses.
That happens to be like the weakest parts of the former CenturyLink business. It's got a small amount of addressable business opportunity, it's the small fiber with low bandwidth, they retained the better part of that business that has some enterprise opportunity, and also retained their large--
Bordelon: Did we lose Jason? We lost Jason, you're back.
Rachel Warren: I was like wait is that me?
Whiteman: Never know if it's just me. [laughs]
Hall: Is my internet connection unstable or is it just me? Anyway, it's funny, I think really for me and the reason I wanted to point this out is I invested in the company around the time of the Level 3 Communications deal, seeing the potential for a turnaround and it's been painful. There have been a lot of other things that have needed to happen.
I think this was the corner. This was like turn this corner and the business is really turned around. They are at a point now where their cash flows are stable and growing. They're producing substantial free cash flow that's well in excess of the dividend that they pay. They're able to repurchase shares. They're able to put a ton of money back into the business and they are able to grow now. I think it's an under-appreciated business.
The dividend yields still like, I don't know, 6%, 7%, and it's a really secure payout. I think it's a really compelling business and I think it's a successful turnaround. Investors should be able to count on it to be a really stable source of income without senior capital get eviscerated every few years going forward.
Bordelon: Very nice. I love when we can dump your junk off on private equity and see what they do with it.
Hall: Yeah. I think this one is going to work out.
