Verizon Settles, but Price Looks Steep

Telecom gear suppliers are breathing easier now that Verizon (VZ Quote - Cramer on VZ - Stock Picks) has reached a contract settlement with its unions.

Trouble is, some observers say Verizon's apparent victory was a pyrrhic one, the agreement coming as it did without the big cost savings that the New York telco had sought. That means more pressure on a steadily eroding revenue base -- and less money to spend on upgrading a creaky network.

"There's a widespread feeling that Verizon needed relief from the sort of job protection terms that were created in an earlier era," says RBC Capital analyst John Wilson. "If you can't realize savings because you can't resize your workforce," says Wilson, "then it's an inhibitor."

On Friday, Verizon shares fell 42 cents to $36.23.

Security

Thursday evening's tentative five-year contract, covering 79,000 Verizon employees, calls for wage hikes and continued job security. Those measures will prevent the company from cutting union workers or transferring jobs to other states.

Going into the negations, the nation's largest phone company had hoped to take greater control over job cuts and other expenses, as its core business shrinks and sales flag. Though Verizon will hand out an immediate 3% bonus to union members this year and raise wages by 8% over the next five years, company reps say the new deal will save millions of dollars compared to the previous three-year contract.

Certainly, by settling the labor dispute, the nation's largest equipment buyer can turn its full attention back on lowering its $52 billion debt load and upgrading its network. But gearmakers that had once braced for a bitter, prolonged strike and subsequent order delays now have to wonder what happens to spending levels as Verizon returns to status quo.

In the near term, says Lehman Brothers' analyst Steve Levy, "this should be a positive for the group," referring to vendors who should get some orders as Verizon returns to business as usual.

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