Risk of Supply Shock From AT&T

MARCH 23, 2011   THE WALL STREET JOURNAL

By ROLFE WINKLER

Another investor question arising from Monday's megamerger—which plumbers will AT&T go with?

Combined, AT&T and Deutsche Telekom's T-Mobile USA spent roughly $11 billion in 2010 on wireless capital expenditures—that is, the plumbing that keeps their networks flowing freely. If the merger is approved, big changes may be made to how those billions are spent, creating winners and losers among infrastructure suppliers.

In the early going, AT&T expects to boost its own capex by $2 billion in order to integrate T-Mobile's network. One winner could be tiny Tekelec, said analyst George Notter of Jefferies. AT&T accounts for a fifth of its revenue and might use more of the company's technology to unclog its network by shifting traffic to T-Mobile's.

Another early winner could be Alcatel-Lucent, which generates about 5% of revenue from AT&T Wireless, estimates Mr. Notter. AT&T previously chose the company as one of its dominant infrastructure suppliers, whereas T-Mobile went with Nokia Siemens Networks, a joint venture of Finland's Nokia and Germany's Siemens. After the deal goes through, it is likely Alcatel wins a bigger share of the combined companies' capex, as AT&T engineers stick with what they like.Ericsson works with both AT&T and T-Mobile, so it isn't clear how it will fare.

After integration spending, however, suppliers could face tougher times as AT&T seeks cost savings in the combined capex budget. And suppliers could face pricing pressure as two U.S. super-buyers, including Verizon Wireless, negotiate tougher terms.

One company that will look smart if consolidation squeezes suppliers: Motorola. It is selling its networks business to Nokia Siemens.

Write to Rolfe WInkler at rolfe.winkler@wsj.com