Analysts stay bullish after AT&T’s deal for Lumen’s consumer fiber biz

Wall Street analysts view AT&T’s (NYSE:T) $5.75B purchase of Lumen’s (NYSE:LUMN) consumer fiber business as “a positive” and “strategically aligned.”

The transaction will benefit both parties as it boosts the U.S. telecom giant’s fiber footprint and reduces debt and creates a leaner business structure for the smaller rival.

The deal for AT&T will add about 1M fiber customers and expand coverage by 4M fiber locations across 11 U.S. states. Analysts calculate it to be about $1,300-$1,400 per fiber passing.

The deal will bring Lumen’s net debt to adjusted EBITDA ratio to 3.9x from 4.9x, reduce its capital spending on fiber business by about $1B, improve its annual cash flow, open refinancing opportunities, and sharpen its focus on enterprise fiber business and customers.

Morgan Stanley says from a competitive perspective, about 85% of the newly bought footprint competes with Comcast (CMCSA) or Charter (CHTR).

The research firm thinks AT&T now has the opportunity to grow the acquired fiber customer base, ramp fiber penetration in the acquired footprint from 25% to 40% over time, and improve its mobility market share in the newly acquired and ultimately converged markets. They continue to stay bullish with an “overweight” rating on the company’s growth prospects.

“This growth is driven by a healthy U.S. wireless industry, improving performance at AT&T Wireless, rapid growth by AT&T Fiber, and ultimately yielding double-digit or low-teens adj. EPS growth. Driving this growth is both broadband market share gains and a rapidly expanding fiber footprint. AT&T, we believe, has the fastest-growing fiber footprint in the world at ~3 mm/year,” Morgan Stanley said Thursday.

UBS says the deal would solidify AT&T’s position as “the largest converged fiber provider in the U.S.” as it targets to reach 60M homes by 2030 vs. Verizon’s (VZ) plans for 35-40M and T-Mobile’s (TMUS) 12-15M. They continue to rate it a “buy.”

UBS sees the transaction as a positive for Lumen and believe the ability to stabilize revenue and EBITDA performance will be key to driving investor sentiment and long-term value accretion for the company.

Bank of America says the transaction is consistent with AT&T’s strategic focus on connectivity, its focus on expanding fiber locations, and its emphasis on using bundling to enhance market share.

“AT&T’s existing business is delivering solid wireless and consumer broadband growth, which we expect will be enhanced and extended by the announced deal… AT&T planned sufficient financial flexibility to accommodate the opportunity within its $10 billion of flexible capital, which ensures its capital return (dividend/buyback) plans can be maintained,” BofA said Thursday. They maintain a “buy” rating.

Analysts at Oppenheimer said they think the deal is “a slight positive” for AT&T and supports its convergence strategy in a relatively small transaction.

“It reinforces T’s position as the largest and fastest fiber builder and adds wireless convergence upside,” Oppenheimer said in its note. They maintain “outperform.”