Fear of huge liabilities related to lead remediation has pushed shares of
Verizon Communications
and
AT&T
lower. The cost of fixing the problem may have been overstated.
In early July, The Wall Street Journal reported that thousands of miles of copper telecom cables wrapped in lead were still in service throughout America. The revelation sent shares of
Verizon
(ticker: VZ) and
AT&T
(T) both down more than 12% in the days following the report. Shares have recovered some, but Verizon stock is off about 6% since July 9, the date of the first article, while AT&T shares are still off about 5%. The
S&P 500
is up about 3% over the same span.
Uncertainty is a big reason both stocks are down. Is the total liability measured in the billions or tens of billions? Wall Street just wasn’t sure.
New Street Research analyst Jonathan Chaplin initially sized the liabilities in a report published about a week after the initial WSJ article. He used existing data to estimate how much lead was out there, where it was, and how much it would cost to replace. His initial estimate to remove lead-wrapped wires and upgrade systems was about $60 billion for the entire U.S. telecom industry. What’s more, he counted AT&T’s total exposure at roughly $35 billion and Verizon’s at about $8 billion.
Those are big numbers to be sure, but Verizon and AT&T are expected to generate roughly $35 billion in free cash flow a year on average, combined, over the coming few years.
More detail has come out from the telecom companies in the days and weeks following the initial shock. It looks to Chaplin like his first estimate was too high. “New data points have emerged in the last 24 hours which have helped us refine our estimate for the costs of lead remediation,’ wrote Chaplin in a Friday evening report.
AT&T believes less than 10% of its 2 million miles of copper cabling is sheathed in lead. More than two-thirds of that is buried in a conduit. The rest of the cabling is overhead.
Verizon says it has about 540,000 miles of copper in its network and that a small percentage is sheathed in lead. Chaplin believes that 50% of Verizon’s network is overhead. Aerial wires should pose less of a health risk to Americans.
His new estimate for lead remediation for AT&T is about $7 billion, down from $35. His estimate for Verizon is now about $1 billion, down from $8 billion.
“At this point, the equities have lost about double our updated worst-case for the total cost of remediation for the industry,” added Chaplin in his note. AT&T has shed more than $6 billion in market capitalization. Verizon has shed more than $8 billion. “The sell-off should have run its course.”
His costs are for remediation and not for personal liability claims. Aerial cables and cables buried in conduits should pose less of a health risk than lead pipes for drinking water. That’s just a guess.
Legal settlements for lead pipes in the water supply of Flint, Mich., totaled about $600 million.
Write to Al Root at allen.root@dowjones.com
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