AT&T deal could spur supplier consolidation

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AT&T’s plan to buy BellSouth for $67bn, creating the world’s biggest telecoms group, is likely to have far-reaching repercussions for equipment suppliers, perhaps even triggering long-mooted consolidation in the sector.

Analysts point out that previous mergers in the US telecoms industry have generally been justified on the basis of cost savings and an overall reduction in capital spending, with a knock-on effect for the equipment makers. “In our view, carrier consolidation is a net negative for equipment vendors,” says Tal Liani, an analyst with Merrill Lynch.

Verizon noted at Merrill Lynch’s annual telecoms conference a few weeks ago that it had unified its procurement activities for fixed line, wireless and the recently acquired MCI business, and highlighted 40 per cent expected reduction in its Fiber to the Home (FTTH) deployment costs – partially equipment.

Cisco Systems, the US’s network equipment market leader, also says consolidation in the telecoms sector is creating a more challenging environment, both on pricing and contract terms.

In the short term, however, analysts and industry executives believe the AT&T/BellSouth deal will have only minimal impact on equipment makers and software suppliers.

In announcing the deal the two companies said they only expected about $450m in annual capital expenditure synergies by 2009 – about 2.4 per cent of the two companies’ total $18.8bn capex spending this year. And as Merrill Lynch points out, integration spending of about $850m is likely to offset most capex synergies.

Indeed the deal could be positive news for some equipment makers including Amdocs, the market leader in billing and customer care; Lucent Technologies, the largest US telecoms equipment supplier; and Adtran, which supplies broadband DSL and other advanced equipment.

AT&T is among the most advanced US telecoms groups in deploying next-generation IP Multimedia Subsystem (IMS) systems – the technology likely to form the core of converged networks in the future. Lucent could also benefit from a more aggressive roll out of 3G services by Cingular.

Amdocs, which counts the former SBC among its biggest customers for billing and customer care, should also benefit from the consolidation. “AT&T has strong ties to Amdocs, which further entrenches the company as the preferred billing vendor across a broad distribution platform,” says Jason Armstrong of Goldman Sachs.

The Israeli-based company, which has been growing rapidly in recent years, was already expected to benefit from the integration of the old SBC systems with AT&T following the completion of that deal late last year and is also building the billing system for AT&T’s internet TV system being rolled out this year.

Underscoring this, Amdoc’s shares gained more than 5 per cent on Monday after the deal was officially announced.

The expanded footprint available to the merged company for the roll-out of internet TV could also benefit Microsoft, which is supplying the software for AT&T’s ‘Project LightSpeed’, designed to enable the group to better compete with the US cable operators in the delivery of advanced video and other services.

While AT&T has been focusing on LightSpeed, Merrill Lynch says BellSouth has been notably less aggressive on video, preferring to expand its high-speed data network with equipment from Tellabs and Redback.

But it could be negative for both Tellabs and Redback, whose shares fell sharply after the AT&T deal was announced. BellSouth is estimated to have accounted for about 25 per cent of Redback’s sales last quarter.

But other analysts point out that any material impact on equipment spending resulting from the merger is unlikely to be felt for at least 18 months. The deal itself is expected to take up to a year to clear regulatory hurdles and telecoms carriers are notoriously slow to change their spending patterns.

Nevertheless, in the longer term the deal is likely to add to pressure on the traditional equipment vendors as the reshaped telecoms industry faces up to the next big challenges.

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