On Sept. 14, CenturyLink announced it is rebranding as Lumen Technologies Inc. (LUMN, Financial).
The word "lumen" comes from Latin, meaning "light," which is a clear reference to the physical substrate of a fiber communication infrastructure.
The announcement contains (as with any rebranding) a lot of shiny words and concepts, as leading the 4H Industrial Revolution, Adaptive Networking, Edge Cloud agility, etc. These topics are of course important and will be even more important in the next decade, but they aren't new. The company has been working on those for several years.
What, then, is really new? It's the way Lumen hopes to be perceived by the market.
A market perception issue
Jeffrey Storey, Lumen's CEO, has recently increasingly communicated the discomfort of seeing the company being valued by the market as a pure old-fashioned communication firm.
This is absolutely true: if we look at the market multiples, Lumen is selling as if the whole company would still be in the old copper-lines telephone business. This is due to the strong association (especially in the U.S.) between the name "CenturyLink" and that kind of business.
Fiber-based companies sell for much higher multiples, so if Lumen's revenue stream actually comes from different businesses (including the much more profitable fiber-based enterprise one) it would at least deserve a re-rating.
During the most recent conference call, an analyst asked Storey why he thinks the market has this wrong perception. He answered:
"I think that, I think there's concern about the consumer business. And I think that people think -- thought about CenturyLink, not Lumen, but thought about CenturyLink as a consumer business with a nice little enterprise fiber business, which is exactly the flip of what we actually are."
Let's have a more detailed look at how management has decided to structure the rebranding. The company said the pure fiber businesses will belong to the Lumen Platform, noting that "the platform brings together our highly interconnected global fiber network infrastructure, edge cloud capabilities, and security and communication and collaboration solutions to deliver a fast and secure foundation for the application and data services vital to our customers' success."
The old Centurylink brand "will remain as a trusted brand for residential and small business customers over traditional networks."
So the rebrand made a clear separation between the fiber and copper-based business lines.
The legacy business
The legacy consumer business is clearly in a secular decline.
Here's the revenue breakdown taken from second-quarter results:
As we can see, the consumer-related sales account for 25% (38% if we add the SMB) of total revenue.
What should the company do with the consumer business? The simplest move would be selling it or spinning it off. An internal review was conducted to determine the best option of monetizing this asset, but no announcement has been made since then.
The most obvious questions are: How much can you sell a declining business for? Will that money be able to replace the missing revenues or, more precisely, to reduce interest expenses by a meaningful amount and compensate for the revenue loss?
The answer is obvious that currently this is not the case, which leaves Lumen with two options:
Wait for the enterprise business to grow to a point where it can afford to dump the consumer business at any price.
Turn around the consumer business to make it more profitable (and attractive).
The company is already moving in the turnaround direction.
Indeed, here's how it is trying to make this evident (taken from the rebranding announcement):
"In addition, Lumen is pleased to announce Quantum Fiber, a fully digital platform for delivering fiber-based products and services to residents and small businesses. Quantum Fiber will use the power of Lumen's extensive fiber network and infrastructure."
We don't know if this will prove to be the right move, but Lumen definitely has an impressive fiber infrastructure that can be leveraged to make it work.
The balance sheet
In a previous analysis of CenturyLink, referring to the fourth-quarter 2018 dividend cut, I wrote:
"While announcing this cut after delaying the decision for several quarters (and continually stating that it was not needed) can harm CEO and board credibility, this was the best decision they have recently made, as high debt is a real risk, especially for a company with more than $2 billion of yearly interest expenses in a market with potentially higher cost of money in the future."
I still think that the dividend cut was a game-changing decision. Indeed, the company has since initiated a slew of deleveraging initiatives (which include a lot of refinancing ones).
Since 2018, the company has been able to reduce yearly interest expenses by a stunning $450 million.
Here's what the company's debt maturity profile looks like:
Since fourth-quarter 2018, also taking advantage of the low interest rate environment, Lumen was able to reduce the 2020 to 2025 debt maturities by $14 billion.
For the next four years, the amount of debt Lumen will have to pay yearly is (on average) approximately equal to the current free cash flow (after deducting dividend expenses).
I've recently heard many arguments that Lumen will not be able to sustain the dividend, but this assertion has never been more wrong than today. Indeed, the company can sustain it for several years because it has now more refinancing possibilities than in the past.
Conclusion
The recently announced rebranding is a clear message to the market, aimed at highlighting the profitable fiber businesses and, ultimately, at a re-rating of the company.
It is also setting itself up for a corporate restructuring.
Lumen continues to pay down or refinance debt at a very fast pace, but this is flying a bit under the radar.
What the market is really focused on is the declining consumer business. We'll see if the Quantum fiber turnaround initiatives will bear fruit and, if successful, Lumen will be able to sell the consumer business.
In the meantime, Lumen Technologies continues to be a solid company with a bright future, and (at the current prices) a 10% dividend to enjoy.
Disclosure: The author currently own shares of Lumen Technologies.
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