As CenturyLink Inc. pivots to a more enterprise-focused business model, the future of its troubled consumer segment is in doubt.
Investment firm Southeastern Asset Management Inc. recently suggested in an SEC filing that CenturyLink should explore asset sales, noting that the company's fiber assets are "extremely undervalued in the stock market" and could attract a lot of buyer interest. But analysts and executives have said fiber is the company's future — while the consumer business could potentially be jettisoned.
After a series of acquisitions, the company's high-speed fiber business is the larger and more profitable venture, while its low-bandwidth legacy consumer offerings decline as consumers drop landline phone service and DSL internet service in favor of newer, faster offerings. Citing the need to free up cash, CenturyLink recently decided to slash its dividend by more than half, riling up investors such as Southeastern, who argue a sale or split would better highlight the value of the company's extensive fiber assets.
Kagan analyst Neil Barbour said in an interview that fiber will play a central role in the future as wireless carriers transition to next-generation 5G technology, but the exact timing of that transition is still somewhat uncertain. Kagan is a research group within S&P Global Market Intelligence.
"The need for fiber backhaul will ratchet up depending on how quickly people buy into 5G, and businesses will find more creative ways to use cloud computing. CenturyLink likely wants to stay agile to meet emerging demands, even if it isn't entirely clear what or where they will be," Barbour said.
As of December 2018, CenturyLink counted more than 450,000 global route miles of fiber. The company amassed these route miles through a series of acquisitions over the years.
"We have consolidated the domestic and international fiber and conduit aspects of Genuity, WilTel, Broadwing, Qwest, Global Crossing and, of course, Level 3," CenturyLink President and CEO Jeffrey Storey said during the company's most recent earnings conference call. CenturyLink closed its $27.98 billion acquisition of Level 3 in November 2017.
"To me, these assets really represent the combination of the best long-haul networks ever built," Storey said.
Southeastern is also bullish on CenturyLink's fiber assets but the investment firm feels the value of these networks is not reflected in CenturyLink's stock price.
"Southeastern intends to talk to such infrastructure funds, to cable companies, and to any other verticals who are heavy users of fiber networks but may want to own such networks or parts of them," the firm said in its SEC filing.
Should a deal not materialize in the near term, Southeastern said another option would be to separate CenturyLink's fiber network business from its consumer business to create two separate tracking stocks.
These stocks "would highlight the value in the two disparate parts of CenturyLink [and] would provide a path towards eventual actual separation of these segments," Southeastern said.
In the fourth quarter of 2018, CenturyLink's consumer revenue fell to $1.29 billion, down 8% year over year from $1.40 billion on a pro forma basis, assuming the Level 3 deal had closed as of Jan. 1, 2017.
By comparison, CenturyLink's business revenue — including revenues from its medium and small businesses, the enterprise segment, international and global accounts, and wholesale and indirect revenue — totaled $4.32 billion, down 2% year over year.
The good news for CenturyLink, said RBC Capital Markets analyst Jonathan Atkin, is that "the challenged consumer business [constitutes] only 25% of the combined company's top line," and the company's Level 3 acquisition "helps CenturyLink pivot to the enterprise business, which possesses better underlying economics than the consumer business."
The bad news, however, is that CenturyLink's consumer business is not expected to improve in the near term. Storey said the company expects in 2019 "to see declines consistent with the past couple of years."
CEO Storey indicated the company is open to various options with the business. "Are we willing to divest the consumer business when we look at it? The answer is of course," he told Citigroup analyst Michael Rollins, adding that the company is "clearly targeting enterprise customers for our growth as the fundamental part of our business."
Storey did not give a timeline or commit to any particular course of action. Southeastern declined to comment beyond its SEC filing.
