Lumen considers 'all possible arrangements' for fiber biz

Lumen Technologies posted a surprise gain in new fiber customers in the first quarter. Meanwhile, the company's management said they're open to all kinds of financial transactions that might accelerate Lumen's fiber buildout.

"We're looking at all possible arrangements," Lumen CFO Chris Stansbury said during the company's quarterly conference call this week, according to Seeking Alpha. 

He also appeared to reference T-Mobile's new joint venture with private equity firm EQT to buy Lumos, a fiber network operator across the Mid-Atlantic. 

"There was an announcement last week where joint venture arrangements exist with a number of our competitors, so we're looking at those," Stansbury said. He added that Lumen is also looking at other models, including selling fiber through a wholesale approach.

"So there's no one answer at this point, and as we get closer to making decisions around those things, we'll certainly communicate that," he said.

Lumen officials for months have been discussing the possibility of offloading the company's "mass markets" division. That business contained a total of 2.7 million residential and small business customers at the end of the first quarter. Close to 1 million of those customers were on fiber connections; the rest were on the operator's copper network.

The financial analysts at New Street Research believe that one of the big wireless network operators in the US – T-Mobile, AT&T and Verizon – will ultimately end up with Lumen's mass markets business.

"We suspect Lumen's mass market assets will ultimately be folded into one of the three national wireless carriers," wrote the New Street analysts in a note to investors following the release of Lumen's first quarter results. "We have argued that the big consolidation wave probably kicks off in 2026 when wireless balance sheets have repaired, future capacity constraints have started to come into view, and no new spectrum has materialized."

Chasing deals

Lumen isn't the only US fiber operator eyeing some kind of M&A. Crown Castle is shopping its fiber and small cell business for an estimated $15 billion. And Frontier Communications recently announced a "formal and comprehensive review process."

Late last year, Searchlight Capital Partners and British Columbia Investment (BCI) took Consolidated Communications private in a $3.1 billion deal. Consolidated is one of the top 10 fiber providers in the US.

Some of the market's big investment companies are keenly aware of the M&A situation in the fiber marketplace.

"We also see lots of interesting opportunities from a carve-out and M&A perspective," Sam Pollock, the CEO of Brookfield Infrastructure Partners, said during his company's recent quarterly conference call, according to Seeking Alpha. Pollock was responding to a question about mergers and acquisitions in the company's "data" business, which covers fiber, data centers and other such digital infrastructure.

"A lot of parties also have significant organic growth opportunities but don't have the capital to execute them. And so, they're looking for partners or they're looking to sell businesses that they can no longer continue to grow," Pollock continued. "So, I think we'll hopefully have a balanced approach to deploying in the data sector, which is both M&A and organic going forward."

In the US, Brookfield backs Intrepid Fiber, which is working with T-Mobile on its fiber effort.

And Brookfield isn't alone. "We've green lit one deal already in the fiber space. We're looking at another one," said DigitalBridge CEO Marc Ganzi during his company's quarterly conference call this week, according to Seeking Alpha. "There's a lot happening in connectivity right now."

Indeed, Ganzi said prices are falling for some fiber assets. He said deals that were once priced at 18-25x EBITDA (earnings before interest, taxes, depreciation, and amortization) are now falling to 10-14x EBITDA.

"And we're even seeing some interesting opportunities in other verticals of residential fiber where we think those could price down into the single digits. So I think there's value to be found, but you have to be careful, right?" he added.

However, neither Ganzi nor Pollock mentioned Lumen specifically. Both DigitalBridge and Brookfield operate on an international stage.

A slowing market

In the first quarter, Lumen reported the addition of 36,000 new fiber customers. That figure cheered most analysts. 

"This was a big improvement, which management attributed to the scaling up of marketing efforts as the deployment across markets is fleshed out," wrote the financial analysts at New Street.

Lumen also said it built fiber to 129,000 new locations and that it remains on track to build a total of 500,000 new fiber locations during 2023.

But the overall US broadband market continues to show signs of slowing. And that could hamper Lumen's overall progress in the coming months.

"Against this sort of backdrop, is it realistic to think that Lumen can float above the fray?" wondered the financial analysts at MoffettNathanson in a note to investors following the release of Lumen's earnings.

Nonetheless, fiber vendor Corning offered a ray of hope. The company acknowledged that sales of its fiber products continue to remain below expectations as operators hoard inventory. But Corning officials said that sales may soon begin to pick up.

"Once carrier inventory starts returning to more normal levels and our customers resume purchasing to support their deployment rates, we would expect to see our order book grow. And that's exactly what is happening," Corning CEO Wendell Weeks said this week during his company's quarterly conference call, according to Seeking Alpha.

"In conversations with our large carrier customers during the quarter, they reinforced their commitment to increasing fiber deployments in 2024 and beyond," he added.