Sneaky AT&T. On Friday afternoon, after markets had closed and many business participants had moved on to either cocktails or other weekend plans, the global service provider announced in a release that it was buying Mexican mobile service provider Iusacell for $2.5B and that it will shrink its 2015 capital spending (capex) 15% from the 2014 plan, to $18B in spending.
The Iusacell deal is just another part of a gigantic trend: Mobile service provider consolidation. The capex news is somewhat more surprising, and it’s going to more ripples through the already beleagured service-provider hardware segment. This is a trend we highlighted on Friday: As the service providers look at new mobile architectures and Software Defined Networking (SDN), they are looking to reduce their spending on equipment. We also highlighted concerns about AT&T spending earlier this year.
Under the terms of the Iusacell agreement, AT&T will acquire all of Iusacell’s wireless properties, including licenses, network assets, retail stores and approximately 8.6 million subscribers. Grupo Salinas, the current owner of 50 percent of Iusacell, will close its announced purchase of the other 50 percent of Iusacell that Grupo Salinas does not own today. AT&T says this deal will help it cover 400 million Mexico & U.S. consumers. Iusacell covers 70% of Mexico’s population, according to the companies.
Why combine the capex and merger news? The two are not unrelated. It’s all about money. You might notice that with a 15% reduction in capex from last year adds up to about $3B, or a little more than the size of the Iusacell deal. Some Wall St. analysts observed that AT&T might be trying to calm investor nerves about the acquisition.
In the meantime, that means more hard times for some networking hardware vendors. The stocks that will likely get hit are Adtran (ADTN), Alcatel-Lucent (ALU), and Juniper (JNPR), says Michael Genovese, Managing Directory with MKM Partners, in a research note issued over the weekend. He also says that this may lead Cisco to guide down for the quarter. Cisco reports earnings this week, on Wednesday.