Lumen Technologies today announced that it has agreed to sell its incumbent local exchange carrier (ILEC) operations in 20 states, which comprise copper and fiber infrastructure, to funds of Apollo Global Management for an enterprise value of $7.5bn. The company’s ILEC business currently operates under the CenturyLink brand and primarily serves consumer and small enterprises in 20 Midwest and Southeast states.
Apollo Global Management’s $7.5bn valuation for Lumen Technologies’ ILEC business represents a multiple of ~5.5x the unit’s 2020 Estimated Adjusted EBITDA of ~$1.4bn. Additionally, the enterprise value of $7.5bn implies a valuation of $1.1k per passing and $5.8k per subscriber. Given that Apollo is assuming ~$1.4bn of debt as part of its acquisition, the implied equity value for Lumen Technologies’ ILEC business is $6.1bn.
Finally, the transaction is expected to close in the second-half of 2022.
ILEC Business Divested – Lumen Technologies
Lumen Technologies is selling the portion of its ILEC business which is i) in its sub-scale, rural Midwest and Southeast footprint, and ii) operating mainly on legacy copper infrastructure, having not yet been upgraded to fiber. Specifically, the company is selling its ILEC Assets in the states of Alabama, Arkansas, Georgia, Illinois, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, New Jersey, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, and Wisconsin.
Within these 20 states, Lumen Technologies is selling its copper and fiber network, which provide broadband and voice services for consumer, small enterprise, and wholesale customers. Additionally, these networks connect to buildings and tower sites. As part of the transaction, Lumen will also carve-out its relevant central offices and back-office support functions.
Passings and Subscribers
Apollo will be acquiring from Lumen 7 million enabled units, of which only 200k are fiber-enabled units (3% of total). Furthermore, the ILEC business has ~1.3 million total broadband subscribers, of which 59k are fiber subscribers.
Lumen’s low fiber passings in its divestiture markets demonstrates that the company is focused on selling its ILEC assets in areas where limited fiber-to-the-home (FTTH) build-out has occurred. Indeed, this is exemplified by the divested ILEC business only having 3% of total passings with fiber, as compared to 11% in the markets retained (see below).
ILEC Operations Retained – Lumen Technologies
Lumen Technologies will retain its ILEC assets in 16 states, as well as its long-haul fiber routes and enterprise CLEC (competitive local exchange carrier) networks in all 36 states. Specifically, the company is retaining its ILEC Assets in the states of Arizona, Colorado, Florida, Idaho, Iowa, Minnesota, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington, and Wyoming.
Overall, Lumen is not selling ILEC assets in its core markets in the West of the United States. Indeed, the company is retaining areas where it has pursued meaningful fiber-to-the-home (FTTH) build-outs. Moreover, these fiber build-outs have given Lumen a competitive advantage in winning customers for its enterprise business.
Notably, Florida, a state which Lumen is retaining, is a top-5 market of the company for broadband passings and subscribers.
Passings and Subscribers
Lumen Technologies is retaining 21 million enabled units, of which 2.4 million are fiber-enabled units (11% of total). Additionally, ~70% of these 21 million passings are located in urban or suburban areas, making them ideal for fiber upgrades. Finally, the retained ILEC business has 3.4 million total broadband subscribers, of which 687k are fiber subscribers.
Transaction Rationale – Lumen Technologies
Lumen Technologies intends to use the net proceeds from the sale of its ILEC business to repay its debt. However, the company notes that the transaction will be “roughly leverage neutral”. This implies that the proceeds will not materially reduce Lumen’s net-debt-to-adjusted-EBITDA ratio, which stands at 3.6x as of Q2 2021.
Lumen Technologies will use the ILEC divestiture to strategically re-position itself. Firstly, to be more aggressive in its enterprise business and secondly, through an acceleration in its pace of fiber deployment. Ultimately, Lumen targets “15 million homes” which represent “great opportunities” for the company to pass with fiber.
Given that Lumen is retaining its long-haul fiber routes, it will also focus investments on strengthening its national fiber network.
Dividend and Share Buyback
Lumen Technologies notes that today’s announcement, coupled with the sale of its Latin American business to Stonepeak Infrastructure for $2.7bn, “will put pressure on our dividend after we close these transactions”. However, the company also states it will be maintaining its dividend at the same level, following completion of these transactions.
To this end, Lumen also announced approval by its board for a $1bn share buyback program.
Strategy – Apollo Global Management
Apollo Global Management is using the opportunity to acquire Lumen Technologies’ ILEC business as a way to deploy fiber-to-the-home (FTTH) broadband, at scale and at an attractive valuation, to millions of residential and business customers. Indeed, Apollo will direct its further investments in the platform towards accelerating the upgrade from cooper to fiber optic technologies.
At minimum, Apollo will need to invest $1.0k per passing to upgrade the infrastructure from copper to fiber. If Apollo were to upgrade all the 6.8 million non-fiber-enabled units, this would imply a capital expenditure program of $6.8bn.
As a standalone company, Apollo’s new ILEC business will be led by Bob Mudge, Chris Creager, and Tom Maguire. This team has significant industry experience having been responsible for the build-out and growth of Verizon’s fiber-based Fios service.
Transaction Advisors – Lumen Technologies and Apollo Global Management
Lumen Technologies’ financial advisors were Citi, Goldman Sachs, Bank of America, and Morgan Stanley. Additionally, Lumen Technologies’ legal advisor was Jones Walker.
Apollo Global Management’s financial advisors were Mizuho, LionTree, Barclays, and Credit Suisse. Additionally, Apollo’s legal advisor was Paul, Weiss, Rifkind, Wharton & Garrison. Finally, Apollo’s regulatory advisors were Jenner & Block and Morgan Lewis & Bockius.