Shares of Lumen Technologies, formerly CenturyLink, fell as much as 13% Wednesday, a day after it said it had agreed to sell a large chunk of its incumbent local exchange (ILEC) business to private equity firm Apollo Global Management in a deal valued at $7.5 billion.

Lumen shares were trading as low as $11.09 each early on Wednesday (Aug. 4), down 13% ($1.66 per share). The stock closed at $11.62 each (down 8.9%, or $1.13 per share) on Aug. 4. 

On Aug. 3, after the market close, Lumen said it had agreed to sell its ILEC assets in 20 states to Apollo, a move that came about a week after it said it would sell its Latin American business to another private equity firm -- Stonepeak Infrastructure Partners -- for $2.7 billion. 

CenturyLink rebranded as Lumen Technologies last year, the first step in preparing the company for what it called The Fourth Industrial Revolution. With the Apollo deal, Lumen sheds local telephone and copper-based broadband businesses with about 6 million customers to focus more intensely on its large enterprise and residential broadband customers, and invest in expanding its fiber network in its remaining 16 states of operation.  

According to Lumen, the properties being sold to Apollo include about 200,000 fiber-enabled units, 7 million addressable locations, 1.3 million broadband subscribers and 59,000 fiber customers. 

After the deal closes, Lumen will have 21 million enabled units, 2.4 million fiber enabled units, 3.4 million broadband subscribers and 687,000 fiber subscribers.   

In a research note, Evercore ISI Group cable, telecom and satellite analyst James Ratcliffe said the moves appear to be an effort by Lumen management to “dramatically reorient the company” by shedding declining high cash flow businesses, sharply increase capital spending and change how it returns capital to its shareholders by reducing or possibly eliminating its stock dividend in favor of share repurchases.  

“We see the moves as an attempt to restructure the company into the kind of fiber infrastructure business being rewarded with high multiples by both public and private market investors,” Ratcliffe wrote. “Given the uncertainty about the company’s strategy, and the disruption of the business and the shareholder base likely to result from this strategic reorientation, we’re staying on the sidelines, and retaining our ‘Underperform’ rating.” 

While Lumen didn’t officially reduce or eliminate the dividend, CEO Jeff Storey said on a conference call to discuss the transaction that the new strategy will put pressure on the dividend.

“[W]ith these transactions, the profile of our business is changing and will change rapidly going forward as we lean into investing for growth and continuing to rationalize the portfolio,” Storey said on the call. “I do realize that will put pressure on our dividend after we close these transactions and the further we get into our investment program.”

That was enough for Ratcliffe, who said at least a reduction is likely after the deal closes.

“We interpret this to mean that the dividend is likely to be materially reduced or eliminated, but that management aren’t taking that step yet, in the absence of certainty that the proposed transactions will be completed,” Ratcliffe wrote. 

While that would be enough to explain the volatility in the stock, Lumen’s sluggish Q2 results added to the pressure. Revenue of $4.9 billion during the quarter came in 2% below Ratcliffe’s estimates and cash flow of $2.1 billion was slightly below the analyst’s forecasts. However, free cash flow was nearly 30% above Evercore predictions, mainly because capital expenditures of $646 million were far below estimates of $899 million.

Apollo intends to invest heavily in the networks to upgrade them to fiber-optic technology. The new unit will be run by former Verizon Communications executives Bob Mudge, Chris Creager and Tom Maguire, who helped create that phone company’s Fios broadband business. 

“This transaction is an important step in our continued efforts to transform Lumen and drive future growth for our company,” Storey said in a press release, pointing out the strong valuation of the deal (5.5 times cash flow). “Apollo Funds will receive a great business with a strong customer base, dedicated employees, and a platform for future growth.” 

The transaction is expected to close in the second half of 2022.

"The team at Lumen has built a great business and we see an incredible opportunity to provide leading edge, fiber-to-the-home broadband technology to millions of its business and residential customers,” Apollo private equity partner Aaron Sobel said in a press release. “Our investment will help accelerate the upgrade to fiber optic technologies, and we are excited to have such a high-caliber management team ready to bring faster and more reliable internet service to many rural markets traditionally underserved by broadband providers.”

Citi, Goldman Sachs, Bank of America, and Morgan Stanley served as financial advisors to Lumen in the transaction and Jones Walker served as legal counsel. Advisors to the Apollo Funds include Mizuho, LionTree, Barclays and Credit Suisse as financial advisors; Altman Solon as telecommunications, media and technology consultant; and Paul, Weiss, Rifkind, Wharton & Garrison LLP as lead legal counsel, together with Jenner & Block LLP and Morgan Lewis & Bockius LLP as regulatory counsel. 

Three more states, and a district, have joined nine others in approving the merger of CenturyLink and Level 3 Communications.

The latest to give it the thumbs up were Delaware, Maryland, Hawaii and Washington, D.C., joining Georgia, Ohio, Utah, West Virginia, Texas, Connecticut, Indiana, Louisiana and Nevada.

The district may be OK with the merger, but regulators in D.C. are still vetting the deal.

CenturyLink filed merger proposal with the FCC and Justice in December. Just two weeks ago the FCC asked for more information from the companies about where they compete in the delivery of business broadband services. Such requests for additional data are not unusual, particularly in this case since the FCC is trying to come up with a list of competitive BDS counties as it preps a vote on deregulating Incumbent Local Exchange Carriers (ILECs), of which CenturyLink is one.

“These additional approvals show that regulators understand the CenturyLink-Level 3 merger will bring substantial service benefits to our customers, employees and communities,” said CenturyLink SVP John F. Jones of the latest state sign-offs. “The combined company will have a stronger and larger network that will help drive economic growth and connect consumers and businesses to the power of the digital world.”

The merger is valued at $34 billion including debt.

Along with the AT&T-Time Warner merger, it will be one of the first big media mergers to be vetted primarily under the Trump administration. Trump has talked about reducing regs, but also about blocking consolidation among media outlets.