SBC/AT&T: Possible Winners & Losers

There's been a proposal, but no answer yet. Still, a possible marriage of SBC Communications Inc. (NYSE: SBC) and AT&T Corp. (NYSE: T) may have a $2 billion effect on the telecom equipment industry in just one year.

Yesterday (Thursday) Merrill Lynch & Co. Inc. analysts Tal Liani and Vivek Arya offered their take on the possible winners and losers if a merger takes place. If the widely rumored deal were to eventuate, it could depress the total U.S. wireline capital spending (capex) amount by 10 percent, or $2 billion, in 2005, the analysts write in a research note.

Merrill Lynch expects SBC and AT&T to spend a combined $7 billion in wireline capex in 2005. And Verizon Communications Inc. may be moved to decrease spending as competitive pressure recedes.

As with all deals of this scope, there will be winners and losers. Liani and Arya believe Adtran Inc. (Nasdaq: ADTN) and Sonus Networks Inc. (Nasdaq: SONS) could benefit from the merger, while Lucent Technologies Inc. (NYSE: LU), Nortel Networks Ltd. (NYSE/Toronto: NT), and Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) may suffer. Here’s how:

Deployment of SBC’s fiber initiative, Project Lightspeed, could be pulled back as the company expends resources to integrate the AT&T network, the brief states. If so, DSL equipment vendor Adtran might find more opportunities in advance of SBC's eventual move to fiber. Alcatel (NYSE: ALA; Paris: CGEP:PA) might also lose some fiber equipment sales but could recoup with increased DSL gear sales.

A combined SBC and AT&T, the analysts say, would work to eliminate redundant spending on overlapping parts of their networks, specifically the two companies’ enterprise data services such as T1, Frame Relay, ATM, Ethernet, and private-line services. However, less entrenched players like Avici “could get shut out,” they write.

But over time an SBC/AT&T combo could provide a big boost to the rollout of intercity Ethernet virtual private LAN services by significantly increasing the number of customer endpoints touched by a single carrier, according to Heavy Reading analyst Stan Hubbard.

“As AT&T’s Rich Klapman and others have noted, there are about 90,000 to 100,000 major business locations that could use high-speed Ethernet services, but no operator has more than 10 percent of these key locations on-net,” Hubbard says. “This would definitely change that situation.” For long-distance services, Liani and Arya believe that SBC would combine the two legacy voice networks in order to “lower the cost of maintenance services from vendors.” This, the two say, would hurt incumbent suppliers Lucent and Nortel.

Spending might increase, however, on next-generation services such as VOIP. Arya and Liani say Sonus Networks might benefit if SBC takes an interest in ramping development on AT&T’s CallVantage, currently the second-largest VOIP service behind Vonage.

A likely theme in the months following an acquisition would be SBC’s firm hold on the reins when it comes to capex spending. “I would be concerned if I were a significant supplier to AT&T,” says Heavy Reading’s Hubbard. “In the past, such as in the case of the failed MCI/Sprint merger, we have seen a substantial pullback in capital spending on the part of the company being acquired."

Following are the equipment suppliers for key components in the carriers’ networks:

SBC


• MSPP: Fujitsu
• Metro WDM: Nortel
• Optical Switch: None
• Core Router: Cisco
• Edge Router: Cisco
• Multiservice Switch: Ciena, Alcatel, Lucent, Cisco
• Ethernet Switch: Cisco


AT&T


• MSPP: Cisco, Lucent, Nortel
• Metro WDM: Nortel, Ciena
• LH DWDM: Siemens, Lucent, NEC
• Core Optical Switch: Ciena
• Core Router: Cisco, Avici
• Multiservice Switch: Cisco, Lucent

In trading Thursday, Sonus finished up 37 cents at $6.19; Avici fell 50 cents on news of a poor fourth quarter; and Adtran gained 16 cents to $17.96. Lucent stock closed up three cents at $3.30, while Nortel closed off two cents at $3.81.

— Mark Sullivan, Reporter, Light Reading