Will AT&T Value BellSouth's Vendors?
Analysts believe that AT&T Inc. (NYSE: T), being the dominant player and the initiator of the $67 billion merger with BellSouth Corp. (NYSE: BLS), is likely to impose its strategy and vendor relationships when the two carriers combine. Analysts say this raises questions about Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), Redback Networks Inc. , and other BellSouth vendors. (See AT&T Deal Could Spur Cable Buys.)
Vendors already “in” with AT&T and its Project Lightspeed fiber initiative include Alcatel (NYSE: ALA; Paris: CGEP:PA), Cisco Systems Inc. (Nasdaq: CSCO)/(Scientific Atlanta), Ciena Corp. (NYSE: CIEN), Motorola Inc. (NYSE: MOT), and Siemens AG (NYSE: SI; Frankfurt: SIE). (See AT&T Shines a Light on Lightspeed and SBC, Microsoft Defend Lightspeed.)
AT&T also said recently it will be upgrading its optical backbone to OC768 throughout 2006. “This should work out well for folks providing equipment for that AT&T IP/MPLS and optical backbone, because the goal is to move the traffic from the three combined companies to a single network that will support a whopping huge amount of traffic,” says Heavy Reading analyst Stan Hubbard.
Siemens, Cisco, and Ciena could each benefit if AT&T extends its backbone upgrade into BellSouth territory. Siemens would provide long-haul DWDM equipment, Ciena would provide its Coredirector and optical switches, and Cisco would provide its IP/MPLS technology.
But some equipment vendors may not have such a well defined future inside the AT&T/BellSouth combo. Tellabs and Redback, for instance, are two names analysts are batting around as ones to watch as this merger commences.
Tellabs won a contract to provide BellSouth’s fiber to the curb (FTTC) equipment roughly a year ago, at which time analysts said the FTTC business could yield the company $150 million in sales during 2005. (See Analysts See Tellabs Win at BellSouth.) AT&T uses a fiber-to-the-node strategy (FTTN), which it says is complementary to BellSouth's access efforts. But, still, the option to go with FTTN all over does exist. And if AT&T does go with FTTN everywhere, Tellabs will have a tough time holding on to its place in the network, writes UBS AG analyst Nikos Theodosopoulos in a research brief.
AT&T said Monday it would continue apace with the fiber rollouts of both companies, but made no specific comments on the technologies that would be used.
"All I can say is that we have close relationships with both companies and we have for years," says Tellabs spokeswoman Ariana Nikitas. "We sell a range of products that address both transport data and fiber access needs."
For Redback, too, the AT&T/BellSouth merger brings some anxiety over future business. “People are wondering just what happens to Redback if the combined company decides to leverage its R&D progress on the Lightspeed Project across the BellSouth territory,” Heavy Reading’s Hubbard says.
BellSouth has been using Redback’s SmartEdge B-RAS device for Ethernet aggregation, subscriber management, and edge routing in its own triple-play build. (See Alcatel Names Its 21CN Partners.) Redback investors were worried too, apparently, as the company's shares fell $3.35 (15.40%) to $18.40 in trading on Monday.
Redback did not immediately return calls seeking comment.
For suppliers to Cingular Wireless , Prudential Equity Group LLC analyst Inder Singh sees the AT&T/BellSouth merger as neutral in the near term. (See Cingular's Converged Future.) “We do not expect any slowdown in spending on 3G upgrades at Cingular, with Ericsson AB (Nasdaq: ERIC) representing the largest vendor in this network,” Singh writes in a brief Monday (See Ericsson Expands Cingular.)
“Lucent Technologies Inc. (NYSE: LU) should also benefit from this spending, though it may be offset to some degree by slower spending on the AT&T/BellSouth wireline network,” Singh adds. (See Lucent Expands Cingular.)
In terms of the overall effect of the merger on capex, analysts’ views are mixed. “It would create even more customer concentration for equipment suppliers, and a combined T/BLS would likely pursue even more discounts,” writes UBS's Theodosopoulos.
On the other hand, Theodosopoulos suggests, the wireline networks of AT&T and BellSouth do not overlap, so no basic capex “synergies” will happen there.
Prudential's Singh stresses that because the merger will speed the movement of the BellSouth network toward next-generation IP technology, it can only be seen as positive for overall equipment spending.
— Mark Sullivan, Reporter, Light Reading