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From the distressed debt dustbin to an AI darling, all in less than a year. Not long ago, US regional telecoms company Lumen Technologies was seen as a corpse that had been scavenged by Wall Street’s most vicious vulture funds. Now it is the toast of the AI party. Its shares have gained more than 700 per cent since the spring. With its market capitalisation approaching $10bn, suddenly its near $20bn debt load does not look so imposing.
New tech increasingly needs old pipes, and a bunch of previously moribund companies is trumpeting a revival. At Lumen, the rally is being driven by $8bn worth of contracts that it has signed with the likes Google, Amazon and Meta for so-called private connectivity fabric. Lumen, formed last decade through the combination of Level 3 and CenturyLink, is an internet backbone provider. AI hyperscalers and datacentres are buying the access to connect to its ultrafast fibre network.
Another supposedly stagnant legacy telco may also be able to benefit from the renewed importance of old-school connectivity. It may help Frontier Communications to secure a sweeter buyout price from Verizon than the current $20bn on offer. The former’s shareholders believe that dull infrastructure suddenly has more importance in a world where data loads are accelerating and Big Tech has the deep pockets to pay toll collectors to ensure that their demands are met.
The cash from deals with Big Tech is advanced up front while the accounting revenue recognition is more conservative. Interest expense and capital spending remain enormous at Lumen while much of the business is mature and declining — think copper wires.
A complex debt restructuring completed earlier this year gave Lumen increased liquidity as well as a reprieve from pending debt maturities. Still, with annual free cash flow of less than $2bn and a business otherwise in what seemed like terminal decline, an eventual bankruptcy filing had looked inevitable.
The Big Tech deals will help. Even so, the operating numbers remain daunting. But the run-up in its equity capitalisation could allow Lumen to sell fresh shares to shore up its cash coffers with the hope more big datacentre deals appear down the road.
Unsurprisingly, Lumen’s management has leaned hard into the AI hype, declaring that their pipes are essential to unleashing the power of an emerging game-changing technology. Whether that turns out to be true or not, Lumen and peers are well positioned to raise capital while the sun shines.
sujeet.indap@ft.com
