AT&T-BLS Deal A Blow To Equip Suppliers; May Spark M&A
Monday March 6, 10:51 AM EST
The proposed $67 billion acquisition of BellSouth Corp. (BLS) (BLS) by AT&T Inc. (T) (T) will reduce yet again the number of carriers looking to buy network equipment, likely spelling trouble for an industry hurt by consolidation in the telecommunications market.
The pending blockbuster deal comes at a time when telecommunication-equipment stocks have enjoyed a nice run.
Indeed, shares of Nortel Networks Corp. (NT) (NT) are up nearly 60% since its low of $2.26 set in April, while Lucent Technologies Inc. (LU) (LU) is up more than 30% from its low of $2.35 set in March and Alcatel S.A. (ALA) (ALA) is trading 35% higher than its low of $10.44 set in July.
"Telecom-equipment stocks are due to face a cold dose of reality today in light of the AT&T (T) and BellSouth (BLS) announcement," wrote Susquehanna Financial Group analyst Joe Chiasson in a research report Monday. "In general, mergers are bad for telecom-equipment vendors in the sense that they further consolidate carrier buying power, lead to some reduction in the level of aggregate capex [capital expenditures] and delay spending."
As reported earlier, AT&T (T) has agreed to pay $67 billion in an all-stock deal to acquire BellSouth (BLS). The combined company will boast a market capitalization of as much as $170 billion. AT&T (T) was drawn to BellSouth (BLS) because of its 14 million consumers and six million business phone lines.
As with many other industries that may be affected by the AT&T (T)/BellSouth (BLS) deal, the takeover of BellSouth (BLS) is expected to spark consolidation among equipment vendors. Larger companies like Alcatel (ALA), Lucent, Cisco Systems Inc. (CSCO) (CSCO) and Nortel (NT) are seen as acquirers, although acquisitions will likely be targeted at second-tier equipment companies, not each other.
"When you look at next-generation networking technology, you will see vendor consolidation in the application side, on the broadband side, basically where it makes sense," said Bettina Tratz-Ryan, a research director at market research firm Gartner Inc. Consolidation will happen quickly in the next 12 months or so, she noted.
But Standard & Poor's Inc. equity analyst Ken Leon isn't sure consolidation will be enough to help the industry. According to Leon, who is negative on Nortel (NT) and Lucent, both companies have the most exposure to AT&T (T), BellSouth (BLS) and the traditional telecommunications market in general.
"Lucent and Nortel (NT) are exposed and small acquisitions really i[aren't] going to help them," said Leon. (What product a second-tier vendor has will determine if it will be a potential takeover target, he noted.)
"I would dismiss any talk of M&A around large equipment vendors. They all have fairly well-established product lines and don't need to acquire another vendor for product or geography," said Leon.
Among the companies expected to suffer the most due to the merger are Redback Networks Inc. (RBAK) (RBAK) and Tellabs Inc. (TLAB) (TLAB), according to Susquehanna's Chiasson. He said Redback's stock has surged in part because investors expected Redback to take a larger role at BellSouth (BLS), a theory that may be damped with the pending takeover of BellSouth (BLS).
Meanwhile, Chiasson said Tellabs (TLAB) could be hurt over the long term if AT&T (T) opts for different technology then what BellSouth (BLS) has been exclusively using from Tellabs (TLAB). The exclusivity agreement is to expire at the end of 2006, according to the analyst.
Recently, shares of Redback were trading down 16%, or $3.41, to $18.34, on volume of 1.5 million shares. Average daily volume is 1.3 million shares. Meanwhile, shares of Tellabs (TLAB) were off 11%, or $1.70, to $13.37, while Lucent was up 0.3%, or 1 cent, to $2.88.
Among beneficiaries of the merger, Chiasson named Alcatel (ALA), Adtran Inc. (ADTN) (ADTN) and Nortel (NT), among others. In the case of Alcatel (ALA), which recently traded down 0.4%, or 5 cents, to $14.15 on light volume of 1.5 million shares, Chiasson said the company will be a "big winner" since its has a "major end-to-end footprint in AT&T (T)." If BellSouth's residential customer base is targeted for an upgrade of the network, he said, Alcatel (ALA) will see increased business.
As for Adtran (ADTN) and Nortel (NT), Chiasson said AT&T (T) has been a big customer for both companies. Recently, shares of Adtran (ADTN) were up 3.3%, or 91 cents, to $29.20, on volume of 317,889 shares. Average daily volume is 1.2 million shares. Meanwhile, shares of Nortel (NT) were up 0.9%, or 3 cents, to $3.26, on volume of 7.1 million shares. Average daily volume is 21.3 million shares.
None of the analysts owns shares of networking-equipment stocks nor do their firms have investment-banking relationships.
-By Donna Fuscaldo, Dow Jones Newswires; 704-371-4263; donna.fuscaldo@ dowjones.com |
