Cisco, Nortel Vie for Comcast Deal
Comcast distributed the request for proposal last year and it was answered by several optical equipment vendors hoping to supply the gear that will light the MSO's new fiber infrastructure, scheduled for completion late this year.
Analysts at Lehman Brothers say the race is over. The firm issued a research brief Monday saying that Cisco Systems Inc. (Nasdaq: CSCO) and Nortel Networks Ltd. (NYSE/Toronto: NT) were the winners and would share the contract. No details were available on how the deal would be split among the two vendors.
But Morgan Keegan & Company Inc. analyst Simon Leopold says Cisco and Nortel are merely finalists in an ongoing race that only one vendor will win.
How big a deal is it? The guesses range from $50 million to $150 million. Lehman Brothers analyst Steven Levy writes that the deal is worth between “$100 million and $150 million," but several other analysts close to the situation say it is far less. Leopold puts the deal in the $50 million to $75 million range.
Comcast initially announced that its expenditure for the entire project, including fiber capacity, will be around $100 million.
Spokespeople from Comcast, Cisco, and Nortel had no comment on the deal.
If Cisco and Nortel are ahead of the pack, who's dragging up the rear?
Lehman Brothers believes Ciena Corp. (Nasdaq: CIEN) and Lucent Technologies Inc. (NYSE: LU) were the losers in the decision, while Morgan Keegan & Co.’s Leopold says Alcatel was the last to drop from the race sometime in December.
Leopold said Cisco’s and Nortel’s switching and routing equipment is now being field tested in various Comcast networks in what will be the final round of the contest. “This RFP probably doesn’t mean much to the big companies like Cisco and Nortel,” he says. “It probably meant more to the smaller companies that have already been eliminated.”
Ciena’s stock has been on a tear since early December, and Lehman Brothers analysts say this may reflect investors anticipating a Ciena win with Comcast. “For Ciena, this opportunity ... may have been somewhat reflected in improving sentiment for the company, which could disappoint some investors,” a January 3 Lehman research note states.
The deal says something about the winners too. Levy suggests that Nortel, by proposing a next-generation optical solution for Comcast, is continuing to invest in its optical products and focusing on market.
“Nortel suggested at its analyst meeting in early 2004 that the company would increase its focus on the Cable MSO market, which accounts for approximately 10 percent of company sales, by our estimates, so this expected win demonstrates good execution on this plan,” Levy writes.
Meanwhile, Morgan Keegan & Co.’s Leopold believes the Comcast RFP underscores the fact that cable operators have a sizable and, he believes, growing appetite for optical networking equipment. Morgan Keegan & Co. estimates capex devoted to the optical equipment market will reach $9 billion worldwide in 2005. Leopold says several other vendors, including Fujitsu, are placing more emphasis on cable and MSO customers.
Comcast announced in early December that Level 3 Communications Inc. (Nasdaq: LVLT) would provide the backbone for Comcast’s new fiber infrastructure. Analysts agree that Comcast aims to deliver voice, data, and video over the new network, which will cover 95 percent of the company’s footprint.
Shares in Cisco, Nortel, and Ciena fell on Tuesday -- a day when inflation concerns drove the Dow down 99 points. Nortel shares fell $0.20 (5.6%) to $3.35 and Cisco shares dropped $0.76 (3.9%) to $18.56. Ciena shares, likewise, fell $0.26 (7.8%) to $3.06 in trading.
“These are volatile stocks,” Levy says.
— Mark Sullivan, Reporter, Light Reading