CenturyLink, Which May Sell Consumer Business, Also Looks to Next USF

It's early on in considering what to do with the consumer business, Storey said repeatedly under analyst questioning on a conference call Wednesday evening. "The big surprise" of Q1's report was this announcement, Wells Fargo analyst Jennifer Fritzsche wrote investors. "The irony is not lost on us that if successful in doing this it is very much going back to its LVLT fiber enterprise 'roots," she added, regarding Level 3.

Any sale of the unit could pose challenges, analysts suggested. "The 'consumer' and 'business' networks are actually quite entangled, so a separation would almost certainly require some sort of ongoing relationship between the entities for network maintenance and other items, with a union presence making the task even more complicated," wrote MoffettNathanson's Nick Del Deo. "The company would require regulatory approval from state public utility commissions, which have observed service and investment disruptions stemming from analogous" deals involving FairPoint, Frontier Communications and Hawaii Telcom, he continued.

Del Deo called himself "skeptical" that selling CenturyLink's consumer operations would be a good deal for the telco. He cited "low multiples at which assets like these trade and the limited ability to apply leverage to it." That includes the need "to satisfy public utility commissions," he said in an email to us Thursday. To separate that business, the company could spin it off to shareholders, as the unit "would be large enough to be a standalone public company, even if an unloved one. It could pursue a cash distribution strategy, or perhaps try to roll up some similar assets and cut costs," he said. Selling to a private equity firm "comfortable with the declining nature of the business, treating it as a cigar butt with a few puffs left" is another scenario. The analyst said an example is private equity company GTCR's buy of Onvoy, which provides voice and text functionality. That deal closed in 2016.

The CenturyLink executives are "pleased with the performance of our consumer business and are comfortable operating the business for the long term," a spokesperson emailed us Thursday. "We consistently evaluate our portfolio to identify opportunities where we can drive more value. The strategic review is designed to help us better understand whether there are opportunities to better maximize the value of this asset."

Total Q1 sales fell 5 percent from the year-ago quarter to $5.65 billion, said Chief Financial Officer Neel Dev on the call. "There is room for improvement in our revenue performance." Consumer sales fell 8 percent to $1.44 billion. Sales missed analyst expectations while cash flow exceeded them. MoffettNathanson's Del Deo wrote that "top line results this quarter were weak, including at the core business segment. Management suggested Q2 will be soft as well, but expects improvements in the second half." The stock closed down 5 percent Thursday at $10.86.

CFO Dev said the company lost on a net basis about 6,000 broadband subscribers, though it gained subs for faster services. Voice sales fell 12 percent and "going forward, we expect similar declines in voice revenue." The company is also has "de-emphasize[d] our linear video product," Dev said. Other MVPDs are doing similar (see 1905030062), saying broadband is more profitable. Since the company bought Level 3 about a year and a half ago, it's been "improving our customer experience and delivering value" to consumers, expanding its fiber network to reach more potential subs and reducing costs, Storey said. "We will continue investing where we can grow."

It's investing in its Connect America Fund Phase II footprint by adding homes passed, targeting "halo neighborhoods" next to CAF-funded buildouts, the chief added. "We've done well with penetration" in such areas, Storey added. While it's "early" on with the next USF tranche, with the so-called FCC Rural Digital Opportunity Fund, "we look forward to bringing even more broadband to underserved areas." He said CenturyLink receives about a third of CAF II funding: "Our customers have benefited from the CAF II program." He expects similar from the coming fund. Other telcos say similar (see 1905010027).

CenturyLink in August accepted some $500 million annually over six years from the FCC CAF "to bring broadband to approximately 1.2 million rural households and businesses in FCC-designated, high-cost locations in 33 states," its spokeswoman emailed. "The company has enabled broadband to approximately 750,000 homes and businesses nationwide across rural America over the last three years in conjunction with the CAF II program."