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US Deal May Hurt Vendors

The sale of AT&T Wireless Services Inc. (NYSE: AWE) to rival Cingular Wireless, rather than global player Vodafone Group plc (NYSE: VOD), has raised at least one analyst's concerns over the deal’s potentially negative impact on future network investment.

Cingular’s successful $41 billion bid today ends months of speculation over the shape of consolidation in the U.S. cellular space (see Cingular Buys AT&T Wireless). According to Ovum Ltd., the takeover will result in the country’s largest carrier by subscriber base, with the combined company’s 45.3 million subscribers trumping Verizon Wireless's 36 million.

Cingular Wireless announced that the acquisition, subject to the approvals of AT&T Wireless shareholders and regulatory authorities, is expected to close “as soon as late 2004.”

Vodafone -- the only other carrier involved in the bidding -- opted to withdraw from the auction in the early hours of this morning, stating that it was “no longer in its shareholder’s best interests to continue discussions.” The world’s largest carrier stressed that it “remains committed to its existing position in the U.S. market” through its partnership with CDMA (Code Division Multiple Access) telco Verizon Wireless (see V'fone Withdraws AWE Bid).

This approach by Vodafone has set alarm bells ringing over at Lehman Brothers. In a research note, analysts claim that a Vodafone win “would likely have stimulated further capex” within the infrastructure market.

Lehman analysts argue that Vodafone “would likely have invested aggressively in [the AT&T Wireless] brand.” As a financially secure carrier eager for a foothold in North America’s GSM (Global System for Mobile communication) market, Vodafone, the Brothers believe, would have been well placed to help boost AT&T Wireless’s “below average” network quality.

In contrast, the Lehman analysts believe, Cingular’s win “may lead to lower capex” due to a “possible increase in purchasing power” from the new venture and the prospect of both carriers simply combining their GSM networks in an attempt to overcome the quality issues.

LM Ericsson (Nasdaq: ERICY) and Nokia Corp. (NYSE: NOK) together dominate GSM buildout at AT&T Wireless and Cingular. Sweden’s Ericsson is flagged as the “most exposed” network vendor following the acquisition. The combined carrier is expected to account for 6 to 8 percent of the supplier’s revenue, with a “possible 2 percent of revenues at risk from late 2004 or early 2005.”

Nokia is also expected to suffer slightly, with Lehman marking exposure at “no more than 1 percent” of overall revenues.

Shares in Ericsson fell 1.9 percent to $28.03 at press time, with Nokia experiencing a 0.98 percent drop to $22.20.

— Justin Springham, Senior Editor, Europe, Unstrung

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