Iin recent years, Light technologies (NYSE: LUMN) – formerly known as CenturyLink – has refocused its business away from its former wireline and wireline DSL franchises. Instead, it made a big bet on high-speed fiber-based Internet services with its $ 34 billion acquisition of Level 3 Communications. And since early 2019, he has acted aggressively to repay the debt incurred as part of this transaction.

These measures have not borne fruit for shareholders so far. Indeed, Lumen stock has lost more than half of its value over the past five years. Even after taking into account his high dividend, the company posted a lousy total return of -34% during this period.

Stock performance and total return of Lumen Technologies, as data by YCharts.

The stock’s long-term downtrend has allowed Lumen to claim the dubious distinction of S&P 500 stock, although having cut his dividend by more than 50% in 2019. However, management hopes to break with the past by selling some of the assets inherited from Lumen. Let’s see what this could mean for the business.

Management gets frustrated

Lumen has approximately 450,000 miles of fiber road – a valuable asset for the future of computing. In contrast, its copper-based telecommunications business is in long-term decline. Every year more and more people (and businesses) are abandoning traditional landline service. Additionally, DSL speeds over copper wire connections are too slow to be competitive, resulting in persistent subscriber losses.

This combination of growing assets and declining businesses makes Lumen difficult to assess. At company level, turnover and EBITDA have sagged in recent years, contributing to the title’s poor performance.

A year ago, management argued that the stock was significantly undervalued based on the sum of the parts. However, the company’s efforts to better highlight the contributions of the rising and falling portions of its business haven’t led to a big turnaround for Lumen stock.

Source: CenturyLink / Lumen June 2020 investor presentation (slide 18).

As a result, management became increasingly frustrated with the stock’s valuation. During Lumen most recent earnings call, CEO Jeff Storey reiterated his view that the stock trades at a steep discount to the value of its assets. He also underscored the company’s interest in selling non-core assets “to unleash value in our business, further accelerate deleveraging and implement potential buyback programs.”

A deal can be close at hand

Despite management’s interest in selling non-core assets, it wasn’t clear if anyone was interested in buying them – until last week. Private equity firm Apollo Global and Lumen are negotiating a potential sale of more than $ 5 billion of Lumen’s consumer assets in some states, according to a recent Bloomberg report.

Lumen’s consumer segment generated approximately 30% of its segment adjusted EBITDA last year. Based on the announced sale price, the company would retain a substantial share of this business. In all likelihood, it wants to keep the regions where it has invested in fiber upgrades while moving out of the regions of the country where it still offers mainly or exclusively copper-based services.

For long-term investors, the price of any transaction is crucial. Five times the EBITDA would probably be a fair price for the copper wire assets. If Apollo Global demands a significantly lower price, Lumen would be better off standing and continuing to use cash flow from its declining business to reduce its debt and pay its high dividend.

Image source: Getty Images.

What to expect

Even at a price of 5 times EBITDA, selling copper wire consumer assets would inevitably reduce Lumen’s earnings and cash flow. But with expected adjusted free cash flow of $ 2.8 billion to $ 3 billion this year, Lumen can absorb the cash flow impact of a $ 5 billion asset sale while still easily hedging its $ 1 billion. , $ 1 billion in annual dividend payments.

Meanwhile, the proposed asset sales would make Lumen shares more attractive to investors for two reasons. First, the proceeds from the asset sale would allow the company to quickly complete its debt reduction plan, potentially allowing it to resume buybacks within the next year. Second, by disposing of assets with declining income and EBITDA, Lumen can return to growth sooner (albeit from a lower base). These two factors should help the Lumen share achieve a higher profit multiple.

Additionally, Lumen has nearly $ 2.6 billion in debt maturing over the next 12 months, plus $ 1.6 billion in high-cost debt that can be called (prepaid) during this period. period. So depending on the timing of any asset sale, she could quickly use the proceeds to further reduce her debt.

Lumen does not need to sell assets to achieve good results for long-term investors. Over time, its fiber-based business should eventually lead to a return to growth that would rekindle investor interest. Still, selling assets at the right price could accelerate Lumen’s return to growth – and the stock’s recovery.

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Adam levine weinberg owns shares of Lumen Technologies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.