Telecom giant AT&T (T 0.83%) doubled down on its fiber internet strategy on Wednesday with a $5.75 billion deal to acquire Lumen's Mass Markets fiber business. The acquisition will come with approximately 1 million fiber subscribers and 4 million passed locations, expanding AT&T's fiber presence in Denver, Las Vegas, Orlando, Seattle, and other major metro areas. Lumen's assets will form a new fully owned subsidiary.
AT&T already had big plans for its fiber network before the Lumen acquisition. Previously, the company had planned to pass 50 million fiber locations by the end of 2029, mostly through its owned fiber network and with some additional reach from its Gigapower joint venture. With the Lumen deal, AT&T now expects to pass 60 million fiber locations by the end of 2030. That's about double the scale of the company's fiber network today.
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Keeping capital spending in check
Building out a vast fiber network is expensive. The Gigapower joint venture shifted some capital spending away from AT&T, and the Lumen deal will do the same. After the transaction closes in the first half of 2026, AT&T plans to sell partial ownership of the subsidiary to an equity partner that will take on some of the capital investment requirements. The company plans to find an equity partner within a year after the close of the transaction.
Once AT&T identifies an equity partner and completes the partial sale, the subsidiary will operate as a wholesale commercial open-access platform with AT&T as the core tenant. This is similar to how Gigapower operates, and it allows AT&T to expand its fiber reach without needing to take on all the capital spending necessary to grow the network.
AT&T reiterated its 2025 outlook and its plan to repurchase $10 billion of its own shares through the end of 2026. The company also expects its ratio of net debt to adjusted EBITDA to remain around 2.5 once the Lumen deal closes and it finds an equity partner.
Multiple growth opportunities
The penetration rate of Lumen's Mass Markets fiber business, or the percentage of passed locations that subscribe to the service, is roughly 25%. That's far below the 40% penetration rate for AT&T's consumer fiber business, and it's half of AT&T's long-term target of 50%. Bringing Lumen's penetration rate up to AT&T's levels is low-hanging fruit that won't require additional capital spending.
Another opportunity for AT&T is to sell the 1 million acquired fiber customers its wireless service. About 40% of AT&T fiber customers are also wireless customers. These customers have lower churn and higher lifetime value for AT&T than customers subscribing to only one of AT&T's services. In a highly competitive wireless market prone to expensive promotional activity, bundling fiber is a great way to retain customers without breaking the bank.
A smart acquisition
By acquiring Lumen's fiber assets, AT&T gets an immediate jolt in fiber subscribers and a path to expanding its fiber network well beyond its previous plan. At the same time, the company is ensuring that it doesn't overextend itself by planning to partner with an equity investor and unload a portion of the necessary capital spending. This frees up cash for AT&T to proceed with its share buyback plans while keeping its balance sheet healthy.
AT&T still expects to generate free cash flow of at least $16 billion this year. With a market capitalization of around $198 billion, the stock currently trades for a bit more than 12 times free cash flow. While shares of AT&T aren't as cheap as they were a few years ago, the stock still looks like a solid value. With the Lumen deal supercharging AT&T's fiber expansion, now is a great time to invest in this telecom leader.
