One year ago, Lumen Technologies (LUMN) announced a $2.7 billion deal to sell its Latin American operations to alternative investment firm Stonepeak. Just a week later, it signed an even bigger deal, agreeing to sell its traditional telecom business in 20 states to affiliates of Apollo Global for $7.5 billion.
Recently, both of these proposed asset sales achieved key regulatory milestones. That puts Lumen on track to receive a massive cash infusion over the next few months.
Clearing regulatory hurdles
During Lumen's first-quarter earnings call two months ago, CEO Jeff Storey said that the Stonepeak deal was on track to close in the early part of the third quarter -- perhaps as soon as July 1.
Last week, Lumen revealed that the FCC approved the sale of its Latin American business on June 29. That was the biggest remaining hurdle for completing this divestiture. As a result, Lumen and Stonepeak will probably close this deal within the next few weeks.
Meanwhile, Brightspeed -- the new company set up by Apollo to take over the telecom assets it is buying from Lumen -- announced on June 30 that it had "secured all necessary state-required regulatory approvals in the 20 states that comprise its operating footprint."
This asset sale still requires FCC approval. However, that should be a formality, as Brightspeed is a new market entrant and plans to invest over $2 billion to upgrade the assets it is buying. Brightspeed expects the FCC to sign off on the transaction later this quarter, allowing it to close early in the fourth quarter.
A game changer for Lumen
While the gross value of Lumen's two upcoming asset sales is $10.2 billion, the net proceeds will be closer to $7 billion, after accounting for $1.4 billion of debt to be assumed by Brightspeed, pension funding, deal taxes, and other adjustments. But even $7 billion is a massive amount of cash for Lumen. The company's current enterprise value is less than $40 billion.
Lumen Technologies Enterprise Value. Data by YCharts.
Lumen will almost certainly use the bulk of the proceeds to reduce its debt. The recent spike in interest rates will aid this effort by making it cheaper to retire long-term fixed-rate debt.
Management has also hinted that Lumen could consider additional share repurchases after completing its planned asset sales. With a market cap of approximately $11.2 billion today, even a $1 billion share repurchase would make a meaningful dent in Lumen's share count. It would also improve the sustainability of Lumen's sizable dividend, which currently yields 9.2%.
Promising valuation markers
Holding the share price constant, Lumen's enterprise value would likely decrease to around $31 billion by year-end from the company applying asset sale proceeds to pay down debt and buy back stock. However, the valuations Lumen achieved for its pending asset sales suggest that the company is worth a lot more than that.
The assets Apollo is buying amount to a quarter of Lumen's traditional telecom footprint. The $7.5 billion purchase price implies that what's left would be worth $22.5 billion, all else equal. In reality, Lumen is keeping its best markets, particularly those where it has invested the most in fiber upgrades. That could put those assets' true value between $25 billion and $30 billion.
Meanwhile, Stonepeak is buying an even smaller fraction of Lumen's long-haul fiber business, representing just $800 million of annual revenue. That could put the value of the remaining long-haul fiber network between $20 billion and $30 billion.
In short, after completing its 2022 divestitures, Lumen should still have roughly $50 billion of assets. That makes Lumen stock extremely undervalued today. As the company executes on its long-term growth plans -- and potentially sells additional assets -- shareholders could reap big gains.
