AT&T's Mexican Capex Dance
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.)
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:
- Adtran Inc. (Nasdaq: ADTN)
- Alcatel-Lucent (NYSE: ALU)
- Ciena Corp. (NYSE: CIEN)
- CommScope Inc.
- Juniper Networks Inc. (NYSE: JNPR)
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