FON) and Verizon Wireless, which is a joint venture of Verizon ( VZ - Get Report) and Vodafone ( VOD). Audiovox put the cell-phone business on the block in February, after it entered a nonbinding agreement to sell the unit to Curitel for an undisclosed amount. Audiovox then hired Jefferies & Co. to find a higher bid. Word that UTStarcom was exploring the purchase of the Audiovox handset division was first reported in TheStreet.com's Tech Edge newsletter on March 16. Audiovox distributes phones made by Toshiba and Curitel in the U.S. under the Audiovox name. Industry watchers say Audiovox offers a complete handset operation, from supply to distribution. Most important, it boasts a direct relationship with Verizon Wireless, the nation's largest cell-phone service. Analysts note that margins on phone distribution are thin, and the handset operation would make more sense as part of a larger phone business. Audiovox could cash out on the sales at a time when cell-phone sales are reaching record-high levels, allowing the company to focus on its remaining electronics division, which includes a growing portable DVD player business.
While both Curitel and UTStarcom make their own handsets and could try to distribute directly to big telcos such as Verizon, industry experts say the long initial engagement-and-testing process makes that path perilous. The relationship between the handset supplier and carrier is valuable. "It takes a lot of time and effort to build the phone testing and approval process," says Charter Equity Research analyst Ed Snyder. He says big players such as Verizon Wireless don't necessarily have time to start from scratch with a new vendor. "If you don't have access, you can certainly buy it," says Snyder, who has no rating on Audiovox or UTStarcom. UTStarcom makes personal wireless access system, or PAS, networks that effectively substitute limited-range portable phones for wire-line local phone-and-Internet service. This lower-cost system has provided an alternative communication network in areas where there has been limited phone network infrastructure. UTStarcom gained a loyal following last year as investors cheered its success in finding a niche in markets such as China, where it has 45 million subscribers. But analysts say UTStarcom's growth potential will be limited as conventional wireless services get cheaper and more widespread. UTStarcom has been searching for ways to diversify its business. Last week, for example, UTStarcom agreed to buy Telos, a Vancover-based CDMA networking gearmaker, for $29 million. The deal will help UTStarcom expand its infrastructure product offering and allow it to better compete with large players such as Lucent ( LU), Nortel ( NT) and Motorola ( MOT) in the network-equipment market. Curitel is South Korea's No. 3 cell-phone maker, behind Samsung and LG. The company has informally approached Verizon Wireless with the prospect of setting up a direct distribution arrangement that could start up early next year, said one person familiar with the two companies. For the most recent quarter ended in February, Audiovox's handset unit posted a profit of $1.9 million on $240 million in revenue. The revenue number marked an 11% jump from the same period a year ago. The top-line growth came from the popularity of some of its color camera phones that were introduced in the second half of last year.