AT&T Deal Strongarms Network Suppliers

Investors in Ciena and JDSU fret over capital spending.
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The telecom rally took a breather Tuesday as investors continued to weigh the implications of this week's megadeal.

AT&T's

(T) - Get Report

$67 billion acquisition of

BellSouth

(BLS)

isn't due to close until next year,

if ever. But the pact has put telecom equipment suppliers squarely in the crosshairs.

Analysts and investors are trying to figure out how outfits like

Ciena

(CIEN) - Get Report

,

JDSU

(JDSU)

,

Cisco

(CSCO) - Get Report

and

Corning

(GLW) - Get Report

may fit into Ma Bell's spending plans in the years to come.

This means, however, that current BellSouth suppliers like

Tellabs

(TLAB)

,

Redback

(RBAK)

and

Juniper

(JNPR) - Get Report

may get the bump.

Megadeals rarely open up spigots of cash in the network infrastructure market. In fact, fewer buyers tend to make for leaner times ahead for suppliers, say analysts. The Nasdaq Telecommunications index, which had been up 15% this year, fell 2% Tuesday in the wake of the AT&T/BellSouth deal.

"It is not likely that the equipment industry is going to see better growth prospects postmerger in most categories when compared to the buying of the two companies individually," American Technology Research analyst Albert Lin writes in a note Monday.

It's not like AT&T and BellSouth are planning to drastically change their spending habits after the merger closes. The companies said on a conference call Monday that they would probably trim their consolidated capital budget by 2% in 2009. The companies had pro forma combined capex of $17.9 billion last year, AT&T said on the call.

That means the suppliers aren't likely to take a huge hit across the board. Still, investors only need to look at old-line vendors like

Lucent

(LU)

and

Nortel

(NT)

to see how telco consolidation has taken the fun out of selling phone gear. Both companies have seen their sales drop over recent years, forcing cycle after cycle of layoffs and product line cutbacks.

That's why even the biggest apparent beneficiary of the AT&T/BellSouth deal --

Alcatel

(ALA)

-- isn't exactly running a victory lap around the equipment supplier clinic.

Alcatel was selected by SBC prior to the AT&T merger to provide $1.7 billion in broadband gear for the company's fiber optic expansion effort. The plan calls for Internet delivery of TV programming as part of a bundle of AT&T services riding on higher bandwidth connections.

As it stands now, analysts say it is likely that once the deal is done, AT&T will move the BellSouth networks toward the Alcatel IPTV system. This could eventually edge out current plans by BellSouth, which is using Tellabs and Redback gear.

Shares of Alcatel fell 28 cents to $13.87, Tellabs rose a dime to $13.13 and Redback was down 79 cents to $17.61.