VZW+Alltel: Short-term slowdown for network vendors, not much tower risk

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Verizon Wireless’ proposed acquisition of Alltel Communications L.L.C. could wound infrastructure vendors in the short term due to the carriers’ network overlaps and a potential pullback on immediate buildout plans, but overall the merger shouldn’t cause too much concern for suppliers.
An acquisition “typically ends up slowing things down for two or three quarters,” said Matt Thornton, an analyst at Avian Securities L.L.C. Thornton added that AT&T Inc. slowed down on infrastructure spending for at least three quarters after it bought BellSouth Corp. in 2006, leaving vendors in a pinch through much of 2007.
“Integration stuff in the industry is good, but it’s not really good for the vendor community,” said Bill Ho, a senior analyst at Current Analysis. “It’s another company that’s getting bigger that’ll probably squeeze them for better pricing.”
However, Alltel’s mere 5% share of the entire wireless subscriber base in the United States means the impact on wireless equipment vendors will be “fairly immaterial,” Thornton said.
“In the near term all of the CDMA vendors are going to experience a little bit of a slowdown,” he said. “I don’t think it’s going to move the needle all that much. … Overall, I think the implications are fairly small.”

LTE to the rescue
And with both carriers having already pinned their 4G network plans on LTE, there is less emphasis on CDMA and more opportunities for the network upgrades to come.
“That’s another reason why it’s not such a large issue,” Thornton said. “The 3G CDMA buildout at Verizon is really nearing completion, so we’re not going to be talking about CDMA that much longer.”
The CDMA Development Group mostly reserved judgment on the news, and instead offered a quick statement:
“Both are excellent, well-run companies with very similar technology roadmaps. We are sure Verizon will leverage the CDMA platform to continue its exceptional subscriber and data growth.”
Indeed, even as carriers move to newer technologies, they will continue to support existing networks.
Alcatel-Lucent has been the top infrastructure supplier for Verizon Wireless while Nortel Networks Corp. has led much of the network buildout at Alltel, Thornton said. Nortel and Motorola Inc. have presence at both, but have a “very weak 3G presence so they’re trying to regroup around 4G.”
Overall, he doesn’t see any major disruption for those vendors following the merger – though that may change as 4G contracts are formulated in the months and years ahead.

Tower implications
Analysts also downplayed much risk for the tower market.
“With regards to the tower space, we believe this deal is a headline risk, not real risk, as we expect Verizon Wireless will likely have to divest a significant portion of overlapping operations, particularly in smaller markets,” Ric Prentiss, an analyst at Raymond James, wrote in a research note. The firm estimates there are at least 12 million licensed potential customers that overlap between the carriers.
“We also note that when Cingular acquired AT&T a few years ago that the concerns of mass cell site decommissioning were overblown, as the company maintained net sites to improve network quality,” Prentiss added.
Raymond James noted that Verizon Wireless has around 30,000 cell sites, which is the least amount of the nationwide operators.

Back-office impact
A pair of software companies – Convergys Corp. and Syniverse Holdings Inc. – also stand to lose millions when Alltel and Verizon Wireless combine. Convergys said Alltel was one of its top five clients last year, yet it now expects revenues from the account to drop to less than $5 million.
Prentiss and his Raymond James colleague Mark Derussy wrote that the combined companies would no longer require the roaming clearing service that Syniverse provides between both carriers. They anticipate the company generates $25 million annually from the deal between the two networks and expect it to lead to a loss of $19 million in earnings before interest, taxes, depreciation and amortization.
“While clearly a setback, the Verizon/Alltel combination does nothing to change the positive business momentum and growth opportunities available to Syniverse,” the pair wrote in a research note. They pointed to “strong industry trends in wireless data usage” and “a positive impact from reduced end user roaming costs in Europe” as attractive growth opportunities for the company.

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