![]() Even if Lumen were to use all of the deal proceeds to pay down debt (thereby reducing interest expense), this would at best offset half of the lost cash flow. Lumen hasn't been investing much in these states, so it has been generating roughly $1 billion in annual pre-tax free cash flow from this part of its business, holding working capital constant. Source: Lumen September 2022 Investor Presentation. Lumen estimates that the sale of that business will reduce the company's adjusted EBITDA by $350 million this quarter ($1.4 billion annualized). Indeed, the ILEC sale comes with a major drawback: the operations Lumen sold to Apollo have been a huge cash cow in recent years. Given how dramatically Lumen stock has tanked in recent weeks, investors appear to be treating the divestitures (and particularly the Apollo deal) as a net negative. And even after these debt paydowns, I estimate that Lumen would have around $2.5 billion of cash that it could use for further debt reduction or other purposes. In total, these moves would reduce Lumen's debt from $29.4 billion as of June 30 to around $22.7 billion. The company also announced that it will redeem approximately $317 million of debt scheduled to mature between 20 in the next few weeks. Since closing the ILEC sale, Lumen has repurchased another $3.07 billion of debt for approximately $2.9 billion. Lumen likely used the remaining $1.6 billion to repay the $800 million it had drawn on its credit facility as of June 30 and replenish its cash balance. The company also repurchased $390 million of public debt at a slight discount to par. Soon after the LatAm sale closed, the company's Level 3 Financing subsidiary repaid $700 million of its term loan. ![]() Lumen has begun to use the proceeds to pay down debt. Given that Lumen entered 2022 with $2.9 billion of federal NOLs, I suspect that it will incur less than $1 billion of deal-related cash taxes, putting its net proceeds a bit higher. Earlier this year, management estimated that discretionary proceeds would total around $7 billion after tax. Thus, Lumen generated pre-tax net cash proceeds of about $8 billion from these two deals. After closing adjustments, pension plan contributions, and approximately $1.5 billion of debt and finance lease assumption, net proceeds came to $5.3 billion. Last Monday, Lumen closed on an even bigger asset sale, divesting its ILEC (incumbent local exchange carrier) business in 20 states to affiliates of Apollo Global ( APO) for total consideration of $7.5 billion. The company divested its Latin American operations to alternative investment firm Stonepeak for $2.7 billion in cash. On August 1, Lumen completed the first of its two major asset sales. The recent plunge in Lumen stock represents a fantastic buying opportunity. Investors shouldn't fear the near-term earnings and cash flow headwinds that Lumen faces. ![]() Ironically, Lumen just completed a pair of divestitures that generated a sizable cash windfall and improved the business' long-term growth profile. Furthermore, its already-high dividend yield has ballooned to 14.9%, based on the stock's Friday closing price of $6.70. This sharp decline has left Lumen stock trading at its lowest level in more than three decades. Lumen stock has lost nearly half of its value this year, including a 31% slide just in the past month. Rising interest rates, inflation, and the slowing global economy have caused the telecom company to fall even further out of favor with investors. Shares of Lumen Technologies ( NYSE: LUMN) have struggled for years, but 2022 has been particularly terrible. Jetcityimage/iStock Editorial via Getty Images ![]()
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