Whatever politicians, consumers and other service providers think of AT&T's audacious $85 billion bid for Time Warner, the telco's equipment suppliers may well have a sinking feeling about the proposed takeover.
Market research company Jefferies & Co. Inc. reckons any deal would be a bad outcome from the perspective of companies including Adtran Inc. (Nasdaq: ADTN), Ciena Corp. (NYSE: CIEN), CommScope Inc. and Juniper Networks Inc. (NYSE: JNPR), all of which sell network gear and related services to AT&T Inc. (NYSE: T).
That's because analysts at Jefferies believe the takeover could lead AT&T to start reducing investments in fixed-line and mobile networks and instead focus on content development as part a of a "strategic shift."
"We're not suggesting that the operator would dramatically curtail their network spending -- after all, there's lots of traffic growth on the network and the telecom business remains competitive," said George Notter, a Jefferies analyst, in a research note. "Nonetheless, the vigor with which they invest in the network could certainly be diminished post the deal close."
AT&T on Sunday announced its intention to acquire Time Warner Inc. (NYSE: TWX) -- the company behind Warner Bros, HBO and various other high-profile media businesses -- in an $85 billion move. (See AT&T Shakes Industry With $85B TW Bid.)
If approved by competition authorities, the takeover would see AT&T become a key player in both content creation and content distribution. AT&T has unveiled plans to make Time Warner content available across both fixed and mobile devices and reckons the acquisition will create new advertising opportunities in future.
According to Notter, an imminent risk to equipment vendors is that AT&T makes cuts to capital spending next year to finance the Time Warner deal. "It's certainly possible that AT&T could try to optimize their investments to max out cash balances going into the close of the deal," he said.
Notter expresses similar misgivings about Verizon Communications Inc. (NYSE: VZ), which has also focused recent M&A activity on the content area, with a $4.4 billion takeover of AOL Inc. (NYSE: AOL) and a planned move for ailing Yahoo Inc. (Nasdaq: YHOO). (See Verizon Wants More Data on Yahoo Breach.)
As regards AT&T, the vendors that have the most exposure include Adtran, Ciena, Juniper and CommScope, according to Jefferies.
Spending by AT&T has recently accounted for as much as 18% of sales at Ciena and for 7-8% of revenues at CommScope, according to the market research company, and for "mid-single-digit" percentages of sales at Adtran and Juniper.
One vendor that could benefit from the takeover is Arris Group Inc. (Nasdaq: ARRS), says Notter.
"A stronger AT&T video offering … could be a positive as the combined entity can drive video sub additions even faster," he said. "This would be a positive for their [Arris's] STB [set top box]/broadband CPE [customer premises equipment] business."
The danger here is that growth comes at the expense of another Arris customer, adds Notter, and that AT&T chooses to focus more heavily on the development of its DirecTV Now OTT [over-the-top] offering than traditional TV activities.
Shares in AT&T closed down about 1.7% in New York yesterday amid Wall Street concern about the rationale for the move, as well as concern that policymakers will scupper the takeover plans.
Time Warner, meanwhile, suffered a 3.1% fall yesterday after shares had gained about 8% on Friday, when reports first surfaced that a deal was in the works.
Time Warner's share price remains 10% higher than at this time last week.
— Iain Morris, , News Editor, Light Reading