Antec Corp. has parlayed its ties to Tele-Communications
Inc. into a $50 million-plus contract to supply cable-telephony gear to AT&T Corp. --
a deal that could potentially reach $900 million.
The timing of the order seemed to indicate AT&T's
confidence that its $48 billion merger with TCI will go through sometime next year. It
also showed that AT&T doesn't plan to wait for Internet protocol-based systems to
be completed before plowing into cable telephony.
The announcement also boosted Antec, which is partly owned
by TCI, as it sustained a big drop in its stock price following a recent earnings report.
Antec and Arris Interactive, its 25 percent-owned joint
venture with Nortel, announced last Wednesday that AT&T committed to buy $50 million
worth of "Cornerstone" technology for carrying calls over hybrid fiber-coaxial
Antec said AT&T wants to wire Cornerstone technology to
as many as 2 million homes passed by TCI, which the vendor translated into a potential
contract value of $900 million, or an average of $450 per installed home.
How big the order becomes depends on how successful
AT&T and TCI are in marketing cable-telephony services, Antec and Arris executives
Antec said some equipment would be shipped this quarter,
with shipments ramping up after the AT&T-TCI merger closes in the first half of 1999.
AT&T spokesman John Heath said he could not comment on
the contract, other than to confirm that Antec's press release was accurate. AT&T
and TCI are in a "quiet period" related to disclosures about plans for the
Antec's shares which had fallen from $17.63
Oct. 21 to $12.13 last Wednesday, after the company's warning about weak
international sales surged on the news last Thursday. Antec rose $5.25 (43
percent), to $17.38, on the news, which was released the night before.
Arris' biggest domestic customer to date has been Cox
Communications Inc., which signed a five-year, $100 million exclusive deal in June. Cox
now has residential phone service in five markets, with a total of about 18,200 customers.
Cablevision Systems Corp.'s Cablevision Lightpath unit
also uses Cornerstone systems. MediaOne Group uses equipment from rival Tellabs Operations
Antec which is about 18 percent-owned by TCI, its
biggest customer -- was expected to become AT&T's lead cable-telephony vendor,
Warburg Dillon Read analyst Nikos Theodosopoulos said. TCI deployed Cornerstone gear in
Hartford, Conn., and Fremont, Calif., before deciding not to pursue cable telephony on its
Theodosopoulos agreed with Antec executives that the
deal's success will rely more on issues like marketing and billing than on
The Cornerstone system uses a host digital terminal at the
cable headend and voice ports at customer homes or businesses. Customers like Cox and
Cablevision hand calls off to other phone carriers via switches, which is how AT&T
will likely deploy services until IP-based voice networks are ready.
Antec and Arris officials said IP systems are probably
still a couple of years away, as standards are developed and a host of technical issues
are resolved.Arris has said that it intends to migrate Cornerstone technology to
work with IP-based systems, in addition to traditional switched networks.
The potential for new revenue streams from telephony and
data services is becoming an increasingly important driver for cable operators' stock
prices. Sanford C. Bernstein & Co. media analyst Tom Wolzien said last week that he
thinks that cable-stock prices already seem to assume penetration rates of 30 percent for
telephony and 20 percent for data services over the next three years.
Antec said the AT&T contract covers three-and-one-half
years, and it assumes that TCI will pass 17 million homes, which is roughly what TCI
figures its base will be after pending joint ventures close. The arithmetic in the Arris
order suggested an assumed penetration rate of about 12 percent of TCI's base over
about three years.
The financial impact on Antec is hard to gauge because
Nortel won't disclose how much money Arris has lost, Theodosopoulos said. Antec
won't get its 25 percent share of any profits until Nortel, which has absorbed the
losses so far, gets paid back, he added.
But Antec should benefit from its 25 percent ownership of
Arris when the venture's perceived value grows, Theodosopoulos said. When Antec stock
was at $12 per share, Antec was getting no value for Arris, he added.
AT&T's links to Antec go back as far as 1992, when
the two companies collaborated on an HFC-phone product branded "CLC-500." That
project was quietly scuttled by AT&T and Antec in late 1995, when developmental
challenges were deemed too steep. After that failure, Antec linked up with Nortel to form