ADC Pact Propels Andrew

Investors await another wave of telecom consolidation.
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ADC

(ADCT) - Get Report

and

Andrew

(ANDW)

agreed to a $2 billion all-stock merger, sparking a rally among wireless networking component suppliers.

The deal between the wired and wireless gearmakers calls for ADC to issue 0.57 share for each Andrew share. The deal translates to a 30% premium for Andrew's holders, going by Tuesday's share prices. On Wednesday, though, Andrew rose 8% and ADC fell 16%.

Andrew, a Westchester, Ill.-based wireless infrastructure shop, has been

squeezed by the consolidation of its telco customers including

Cingular

and

Verizon Wireless

. Ahead of the deal's announcement Wednesday morning, Andrew shares were down 31% from their one-year high in July.

The consolidation trend is expected to continue in the telecom industry, shifting from the service providers to the gearmakers. The pending deal between

Lucent

(LU)

and

Alcatel

(ALA)

is an example of a pairing that looks to broaden product offerings and cut costs in response to the shrinking field of equipment buyers.

On a conference call with analysts, ADC executives said they expect the deal to be nondilutive to earnings for the first year and accretive to earnings starting in 2007.

ADC posted solid fiscal second-quarter numbers, with adjusted net income of 29 cents a share on $365 million in sales. That compares with adjusted profit of 9 cents a share on $313 million in revenue in the year-ago quarter.

Analysts were looking for 29 cents of adjusted earnings on $345 million in sales in the fiscal second quarter, according to Reuters Research.

Looking ahead, ADC expects full-year net income of $1.07 a share on sales of $1.37 billion, roughly in line with Wall Street expectations.

Industry observers see a strong likelihood for future deals among networking shops, particularly the wireless infrastructure suppliers that may be looking to join with larger organizations.

Shares of wireless component maker

Powerwave

(PWAV)

rose 39 cents, or 4%, to $10 and

RF Micro Devices

(RFMD)

was up 12 cents, or 2%, to $7.29 in early trading Wednesday.

ADC shares fell $3.63 to $18.75 and Andrew rose 72 cents to $10.50 in early trading Wednesday.

The two companies expect the deal to close before the end of this year.