Megamerger casts uncertainty on wireline vendors

The proposed merger of AT&T and BellSouth has as yet unknown implications on several of the wireline equipment vendors that supply each company.

For example, it's unclear how the merger will affect Redback Networks, which supplies both BellSouth and AT&T with edge routers but has often touted BellSouth as a flagship customer win.

The added uncertainty led Morgan Joseph analyst Erik Zamkoff to downgrade Redback in the wake of the merger news. "The fundamentals remain intact across Redback's business," Zamkoff wrote in a research note. "AT&T and BellSouth are both solid customers. However, given that BellSouth is currently one of Redback's largest customers and that Redback's project with BellSouth is a key portion of our near-term financial assumptions, we believe this transaction will create near-term uncertainty and an overhang on Redback shares in the near-term."

Perhaps to a lesser extent, the merger raises questions for Tellabs, which also sells gear to both carriers. BellSouth contributes more than 10% of Tellabs' revenue, but AT&T, which uses Tellabs' crossconnects and access gear, does not.

Tellabs became BellSouth's main supplier of fiber-to-the-curb (FTTC) equipment in 2004 by acquiring Advanced Fiber Communications, which had itself acquired Marconi's access business earlier that year. BellSouth, which has historically found FTTC a better economic fit for its network, remains the only customer of the Marconi FTTC products. It's unknown whether that will change after the company merges with AT&T, which is currently deploying fiber-to-the-node (FTTN) technology from Alcatel.

Both BellSouth and AT&T are jointly investigating Gigabit passive optical networking (GPON) technology, a likely to successor to both FTTN and FTTC of which Tellabs is one supplier.

The merger could mean trouble for Lucent Technologies, since BellSouth is the biggest customer for Lucent’s legacy Sonet and multiservice provisioning platforms (MSPPs) and its third largest customer overall (after Verizon Communications and Sprint). And Lucent hasn’t done as well selling to AT&T. Lucent has won IP multimedia subsystem (IMS) architecture contracts with all three major carriers, but its recent win at BellSouth for softswitches and media gateways could be threatened by the merger, Susquehanna Financial Group analyst Joe Chiasson said in a note issued this morning.

Chiasson called Alcatel “the big winner” in Bell reunification, citing the vendor’s strong position as AT&T’s broadband access supplier. If AT&T eventually targeted even half of BellSouth’s customers for a FTTN buildout, a heuristic he calls comparable to AT&T’s current internal plans, “Alcatel just picked up roughly 6 million lines of IPTV business, assuming Alcatel doesn’t drop the ball,” he said.

Chiasson also saw an upside for Fujitsu Network Communications, which has long supplied AT&T (as SBC) with Sonet MSPPs, and Nortel Networks, which has done the same with Sonet and dense wavelength-division multiplexers.

Ciena could also benefit from the proposed megamerger, since it counts both carriers as major customers of its long-haul optical equipment and in addition supplies AT&T with optical crossconnects.

Adtran might also benefit from the deal, as it supplies access gear to both carriers but more to AT&T, which contributes about 20% of the vendor's revenue. In a speech given at an investor conference this morning, an Adtran executive conjectured that the merger could yield upside for the access gear-maker, assuming AT&T brings its access strategy into BellSouth territory.