AT&T Wireless deal worries industry
By Andrew Backover
USA Today
Cingular merger could impair profits all around Cingular Wireless' acquisition of AT&T Wireless could have a big impact on cell-phone price plans, on share prices of communications equipment vendors and on merger-and-acquisition activity among regular phone companies.
The day after Cingular announced its $41 billion takeover, which upon regulatory approval would create the No. 1 cell-phone carrier, the U.S. telecommunications industry pondered the ripple effects. The deal should help Cingular's owners, local phone companies SBC Communications and BellSouth, be more competitive overall. And it is seen as a good thing in the long term for the cell-phone sector, with consolidation from six to five national carriers expected to ease price wars.
In the near term, however, the deal is likely to create more uncertainty in the industry because of:
Wireless competition.
While Cingular is busy trying to close the deal in 2004 and merge operations in 2005, analysts expect foes to get aggressive, possibly hurting profits all around.
AT&T Wireless' instability could "help other carriers gain additional near-term growth, but it is also likely to lead to greater near-term competition," according to an analysis issued by Goldman Sachs. "We have already seen (AT&T Wireless) introduce more aggressive promotions and pricing, and this is likely to intensify."
Network sales.
As AT&T Wireless and Cingular eliminate overlap, their capital spending on things like network equipment appear likely to shrink.
A research report yesterday issued by Piper Jaffray says their combined spending might decline 15 percent this year to $5.9 billion and continue falling to $4.6 billion in 2007.
Wells Fargo securities analyst Casey Ryan says that could hurt network suppliers, such as Nokia, Ericsson and Powerwave. It comes as they were hoping to rebound after several years of drought. "A lot suppliers in this space are banking on carriers spending their full budgets," Ryan says.
Phone company mergers.
As SBC and BellSouth use debt and cash, it could sideline them from other deals involving phone companies such as AT&T and MCI. Fitch Ratings put the credit ratings of BellSouth and SBC, once thought predators for long-distance carriers, on negative watch after the deal was announced.
The deal "would somewhat tie their hands," says John Culver, senior director of Fitch's telecom group. "They could certainly contemplate other transactions but, at least in the near term, other transactions would be placed on the back burner."
