AT&T Drops T-Mobile Bid: Positive for Adtran, Juniper, Alcatel-Lucent

AT&T Inc. (NYSE: T) said on Monday that it was ending a $39 billion bid to acquire T-Mobile USA, a unit of Deutsche Telekom AG, which began in March. The announcement came via an AT&T statement and after a thorough review of options.

The role of the Federal Communications Commission (FCC) and the Department of Justice (DoJ) in blocking this transaction does not change the realities of the U.S. wireless industry. It remains one of the most fiercely competitive in the world, with a mounting need for more spectrum that has not diminished and must be addressed immediately, the company said.

To reflect the break-up considerations due Deutsche Telekom, AT&T will recognize a pretax accounting charge of $4 billion in the fourth quarter of 2011. Additionally, AT&T will enter in to a mutually beneficial roaming agreement with Deutsche Telekom.

We believe this development is a short-term positive for AT&T-exposed equipment vendors within our research group -- specifically Adtran, Juniper, and Alcatel- Lucent, Jefferies analyst George Notter wrote in a note to clients.

The news brings to an end an issue that was the source of tremendous uncertainty for AT&T's vendors, as the carrier is a major source of spending in the industry. AT&T materially dialed back orders with a number of vendors, including Adtran Inc. (NASDAQ:ADTN) and Juniper Networks Inc. (NYSE:JNPR).

In any case, now that the company is past the subject of the merger, they are poised to start spending aggressively, thereby resulting in more orders for vendors. Other vendors with significant AT&T exposure includes Alcatel-Lucent (NYSE:ALU), Ciena Corp. (NASDAQ:CIEN), RadiSys Corp. (NASDAQ:RSYS) and Tellabs, Inc. (NASDAQ:TLAB).

With news of the deal termination now official, we think it's possible that vendors will see some incremental budget flush in the last 1.5 weeks of the year, said Notter.

Following are Jefferies' views of various vendors:

Adtran (15-20 percent of sales from AT&T): This is clearly a near-term positive for Adtran as spending at AT&T comes back. In particular, Notter expects the vendor might be able to provide an incrementally bigger-than-expected guidance in mid-January - especially if AT&T exhibits some fourth-quarter budget flush and starts the first quarter relatively fast.

Ciena (About 15 percent of sales from AT&T): The analyst said the company should, theoretically, benefit in the short term from any pick-up in AT&T spending. Ciena, of course, is heavily exposed to AT&T and recovered ordering from AT&T should help Ciena's Carrier Ethernet Service Delivery (CESD) business rebound in its fiscal first quarter and beyond. Looking at the big picture, however, a recovery of the CESD business doesn't make up for long term concerns about profitability and legacy product mix.

Juniper Networks (About 10 percent of sales from AT&T): Notter expects that Juniper is also a significant beneficiary from a rebound in capital spending at AT&T. Now, with the T-Mobile USA deal off the table, the analyst expects that Juniper will benefit from a rebound in the first quarter spending.

Alcatel-Lucent (About 10 percent of sales from AT&T): The analyst also sees the news as positive for Alcatel-Lucent over the short-term as Ericsson and Alcatel-Lucent, of course, are domain vendors at AT&T Wireless. Though the T-Mobile news bodes positively in the near-term, Notter has longer-term concerns with Alcatel-Lucent. At some point, EVDO Rev A software sales contract and the benefits eventually come out of the profit and loss and the economics of the business could be significantly damaged with any material declines in the company's Rev A sales next year.