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AT&T's Mexican Capex Dance

Dan Jones
11/10/2014

AT&T's $2.5 billion acquisition of Mexican mobile operator Iusacell has precipitated a cut in its capital expenditure plans for 2015, which could affect a number of disparate vendors, according to financial analysts.

AT&T Inc. (NYSE: T) revealed Friday that it plans to buy Iusacell for $2.5 billion. The deal will give AT&T a 3G network with 8.6 million subscribers onboard that covers 70% of the Mexican population. AT&T is expecting the deal to close in March next year. (See AT&T to Buy Iusacell, Plans Lower Capex For 2015.)

Analysts say that the deal will give AT&T more Hispanic clout. "We believe [the deal] would significantly improve [AT&T's] ability to market to Hispanic customers in the U.S. and gain better roaming arrangements with other Latin American carriers as well," writes Raymond James Financial Inc. (NYSE: RJF) analyst Simon Leopold in a research note Monday.

At the same time as announcing the deal, AT&T said that it plans to spend $18 billion on capital expenditure costs in 2015. The operator is expecting to spend $21 billion on capex in 2014. (See AT&T: Capex Freeze? What Capex Freeze?)

With the initial completion of its LTE network buildout this year and cost-cutting measures like Domain 2.0 coming into effect, the operator was expected to start to reduce capex anyway. (See AT&T Reveals Audacious SDN Plans.)


Get the latest updates on 4G LTE by visiting our dedicated 4G/LTE channel here on Light Reading.


Analysts, however, note that with AT&T's planned acquisition of DirecTV Broadband Inc. and Iusacell, the focus will now be on keeping a tight lid on spending. CFO John Stephens had originally said in October that AT&T would reveal its 2015 capex plans next January. (See AT&T Adds 500K Connected Cars in Q3.)

"Our sense is that AT&T -- given its relatively low cash position and pending cash outflows for DirecTV and potential spectrum purchases -- has hit a point where they have to manage for cash balances," writes Jefferies & Co. Inc. analyst George Notter in a research note. "Hence, they're cutting next year's capex."

Vendors likely to be affected by AT&T's capex cut
Jefferies, MKM Partners and Raymond James analysts all agree that these vendors are likely to be hit by the AT&T capex positioning:

There is collectively less certainty about how Cisco Systems Inc. (Nasdaq: CSCO) and Ericsson AB (Nasdaq: ERIC) might be affected by AT&T's strategy. "We think Cisco's revenue guidance this week may be soft, largely due to the Service Provider market," writes Michael Genovese at MKM Partners , continuing:

    We think Cisco's U.S. Service Provider orders became substantially weaker during the quarter since it did not agree to a Domain 2.0 deal with AT&T over pricing, and Verizon also began planning for its own NFV/SDN transition with similar pricing discussions according to our checks. We now expect Cisco's product orders to come in up 5%-7% y/y in the October quarter, and think this level of new order intake may not provide management enough confidence to guide 2QFY15 revenue to the 8.5% y/y growth embedded in consensus.

Whatever happens, it appears Ma Bell will be a bit less of a cash cow for telecom vendors in 2015 and beyond.

— Dan Jones, Mobile Editor, Light Reading

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RitchBlasi
RitchBlasi
11/12/2014 | 1:37:59 PM
More on Investment
Okay, to amplify my prior statements, just read this:

AT&T (NYSE: T) CEO and Chairman Randall Stephenson came out against President Barack Obama's plea to ask the FCC to reclassify broadband providers under Title II, a move that he says is driving it to pause the expansion of its ambitious fiber-to-the-premises (FTTP) project into 100 U.S. cities.
RitchBlasi
RitchBlasi
11/12/2014 | 10:17:08 AM
Hola FCC
And given that net neutrality rules and some of the decisions on Title II can impact AT&T financials here in the states, why not invest in another market that could be more attractive.  Seems like everyone from consumers to companies offering services over its network pretty much wants a free ride.   
danielcawrey
danielcawrey
11/10/2014 | 3:32:32 PM
Re: Capex wiggle?
I think given all the money AT&T has been spending on capex it is time for them to tighten things up. The industry is cyclical, and that's mainly due to infrastructure rollouts.

AT&T has spent a lot of money in past years keeping its tech up to date – but with acquistion costs rising, it's time to tighent up the belt. 
DanJones
DanJones
11/10/2014 | 2:19:26 PM
Capex wiggle?
It should be noted that AT&T hadn't actually said how much its capex would be in 2015 yet. They were originally going to reveal it in January.

Still with the LTE buildout complete and the virtualized network projects moving ahead the general trend was almost certainly down whatever...
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