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US Merger to Boost Vendors?

Consolidation in the U.S. cellular space could eventually prove to be a tonic for the health of the industry’s equipment manufacturers, according to analysts contemplating the impact of a possible AT&T Wireless/Cingular Wireless deal.

According to various reports this week, Cingular Wireless, the country’s second largest carrier, has put together a $27 billion offer for its rival, AT&T Wireless Services Inc. (NYSE: AWE), in an effort to battle market leader Verizon Wireless. Press reports say that Cingular, a joint venture between regional Bell operating companies BellSouth Corp. (NYSE: BLS) and SBC Communications Inc. (NYSE: SBC), has offered around $11 a share for AT&T Wireless stock.

Meanwhile, the Wall Street Journal claims that NTT DoCoMo Inc. (NYSE: DCM), already a 17 percent shareholder in AT&T Wireless, is also preparing to mount a takeover bid.

Despite the late emergence of the Japanese carrier as a potential acquirer, it’s the prospect of a Cingular buy that has financial analysts mulling over the impact such a deal will have on the industry’s network vendors.

According to a Lehman Brothers note, LM Ericsson (Nasdaq: ERICY) and Nokia Corp. (NYSE: NOK) together dominate GSM (Global System for Mobile communication) and GPRS (General Packet Radio Service) network buildout at AT&T Wireless and Cingular.

The carriers are two of the Nords' largest customers, and Lehman's estimates suggest a combined carrier entity could approach 10 percent of sales for Ericsson’s infrastructure business, “and perhaps slightly more for Nokia.”

According to Lehman, Ericsson is the leading supplier to Cingular, “closely followed by Nokia, with Siemens at about 20 percent.” Nortel Networks Corp. (NYSE/Toronto: NT) also supplies core switching kit.

Key suppliers to AT&T Wireless include Nokia -- “likely retaining a slight leadership position at this account” -- and Ericsson on the radio access network side, with Nortel and Siemens supplying core network equipment.

A combined carrier is also expected to provide “over 10 percent of sales for Nortel.”

Should the shakeout in the carrier market actually happen, the Lehman siblings expect to see a potential future boost for the troubled sector.

“While consolidation in the U.S. during 2004 could provide some disruption... we see some rationalization as a longer term industry positive.”

— Justin Springham, Senior Editor, Europe, Unstrung
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