US telcos: distant cash flows from fibre are uncertain

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The appeal of annuities lies in their predictability. But in an era of high interest rates, distant cash flows are suddenly less valuable.

That has put US telecoms companies that need to spend tens of billions of dollars to build or retrofit broadband lines in an awkward position. A Lumen Technologies executive summed this up when he enthused about the “beautiful” annuity stream that would come once the fibre was in the ground but acknowledged the challenge of a long payback window.

The sector is not feeling much love from Wall Street. Shares in the likes of Lumen, Frontier Communications, AT&T and Verizon are down between 7 and 75 per cent in 2023, a year in which the S&P 500 is up sharply. The race is on for companies to get to the phase of charging customers for superfast fibre internet before they burn through their cash balances.

Lumen garnered recent headlines for a complex debt restructuring that pushed out maturities a few years in exchange for paying higher interest rates. Its current debt balance of $20bn compares with a market value of just $1bn. Its free cash flow profile amid annual capital expenditures of $3bn is just around break-even.

Frontier has a market capitalisation of $5bn against total debt of $14bn. In 2021 it emerged from a bankruptcy that had cleansed it of $10bn of debt and ostensibly left it appropriately capitalised. Its current annual free cash flow deficit is $1bn, but is supposed to eventually flip to a positive $3bn.

Verizon and AT&T have much larger and diversified businesses. They pay sizeable dividends that support their share prices. For its part, AT&T has a joint venture with BlackRock to fund its fibre strategy.

Even as telcos look ahead to their investments turning into cash gushers, they are still tied to their past. A Wall Street Journal investigation into potentially toxic legacy wires could lead to billions in remediation costs or other liabilities for some companies. Time, as always, is money.

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