TD Cowen Thoughts on T Reportedly Buying LUMN FTTH Assets

TD Cowen analyst Gregory Williams offers insights on Bloomberg's report that T is considering the purchase of LUMN's FTTH assets.

The analyst commented: "This afternoon, Bloomberg reported that T looks to purchase LUMN's FTTH assets for > $5.5B. Details are lacking, but on the surface, T could be acquiring at just ~$1,350/HHP. Valuation aside, T already has commanding leadership in wireless/wireline "convergence" and could elbow out VZ/TMUS to dominate the narrative. TMUS would be far behind, thus dismissive on the idea as lines are being drawn.

More importantly than valuation is the buyer (AT&T) and the lines being drawn that could affect the wireless/fiber sector for years to come. In the race to convergence, the Big 3 wireless carriers are facing wireless market maturity and as such looking to defend their nationwide mobile market share. AT&T and Verizon have both touted the benefits of convergence on numerous occasions, including again at our FTTH Symposium last week (LINK). AT&T and Verizon have touted benefits such as a 400+ pt phone share gain within converged markets, and Verizon noting its phone churn cut in half when converged. As we've noted in the past, to that last point, cutting postpaid phone churn in half would illustratively add ~$1,500+ of wireless customer lifetime value (CLV) easily justifying a $1,000 per home build cost on a FTTH business case that is already positive as a stand-alone case. We see this as a race to build fiber "kingdoms" to play mobile defense. AT&T has a goal of reaching 45MM+ fiber homes in its "kingdom" (plus 5MM+ with its GigaPower JV), Verizon targeting 35-40MM homes (including Frontier), and T-Mobile targeting 12-15MM homes.

For AT&T, assuming the reported potential transaction is for the total ~4.2MM homes, this could be a good deal at a great price. The company can reap meaningful synergies leveraging their own marketing/customer acquisition engine (along with typical network, vendor, and back-office synergies). This deal fits within the $10B M&A envelope messaged at its Analyst Day (and could keep it off balance sheet with its GigaPower JV, again details are lacking). As mentioned, more importantly today's news messages AT&T's conviction around convergence, playing offense while already in a leadership position.

For T-Mobile, who would've logically been in the driver's seat, it signals the Un-carrier's conviction to be the "convergence killer" and "bundle buster". Instead of spending billions on expensive fiber, the company can focus on the network, superior mobile pricing, and capital return for years to come. T-Mobile has the best near-term strategy (its greenfield rural/ SME play has ~2 more years). Should convergence materialize, T-Mobile does have $20B of disposable capital for M&A (beyond its capital return promises) and can gobble up the many smaller fiber players to play catch up (see Figure 2), but would admittedly be playing catchup. Either way, today's news could provoke an overbid by T-Mobile, and either decision will be telling around the wireless/wireline landscape for years to come.

For Lumen, the >$5.5B price point would be a disappointment, especially considering the sale is likely a taxable event. The company admittedly loses little EBITDA, and can shed $1B in capex/year to de-lever the balance sheet. However, it’s a clear signal of its laser focus on Enterprise and the GenAI fiber opportunity. The next step would be try to sell its remaining ~18MM DSL locations."

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