S&P sizes up the potential winners and losers in the race to land a huge government telecom-services contract
From Standard & Poor's Equity ResearchBig U.S. carriers are eagerly vying for a contract to provide telecommunications and networking services to all federal agencies in a deal that could be valued at as much as $50 billion over a period of 10 years, after the current program expires this year. However, some Wall Street analysts see the contract size coming in closer to $20 billion. Standard & Poor's Equity Research Services sees Verizon (VZ), AT&T (T), Qwest (Q), and Sprint Nextel (S), as the main contenders for this juicy contract, named Networx.
An announcement of the winners is expected this month. Here's how Standard & Poor's sees the competition for the largest telecom contract in history playing out.
The Networx contract is significant as growth in the enterprise business and government segments can help offset the continued declines in consumer and long-distance areas. Enterprise and government business is an area that suffers less competition from cable and satellite companies. This area is also unlikely to see the same level of subscriber erosion from customers switching over to wireless technologies.
"Enterprise and government is a sweet spot for telecom companies right now. It's a major growth area that helps offset a slowing growth in the consumer segment," says Standard & Poor's Telecommunications Equity Analyst Todd Rosenbluth.
Rosenbluth also adds that the large Networx deal will most likely be profitable for the providers. Networx will involve both enterprise (national wireline and wireless services, with a focus on emerging IP and wireless services), as well as Universal (wide range of services globally, including legacy frame-relay, and VPNs and VoIP).
After a telecom provider is selected for the Networx contract, that provider receives the opportunity to work with the different federal agencies, but will still need to further compete to win business with the myriad agencies.
S&P believes that Verizon and AT&T are the most promising contenders for the business. Verizon, which carries an S&P investment ranking of 3 STARS (hold), is now the owner of MCI, a company that took part in the prior Networx government contract. Verizon is also very focused on growing its enterprise business. AT&T, also ranked 3 STARS, is also considered a strong competitor in the enterprise and government telecom space. Qwest could also likely be involved in the updated project.
Rosenbluth believes that 3 STARS-ranked Sprint Nextel isn't as strong of a player, compared to Verizon and AT&T. Sprint, following its mergers, has viewed wireline operations as more of an afterthought, in Rosenbluth's view. Instead, the company has been more focused on its wireless segment. Sprint appears to be using its enterprise technology as support for its more important wireless segment, says Rosenbluth.
Rosenbluth thinks Verizon is a very strong contender. Its enterprise business is a large percentage of its business and showed strength in the fourth quarter of 2006, when it generated $5.3 billion in revenues from its enterprise segment (23% of its total revenues). Verizon has also sold off non-core businesses. Investors are likely expecting Verizon to be included in the contract. In Rosenbluth's view, it could be a surprise and hurt investment sentiment for Verizon if it's excluded from the contract.
AT&T, since becoming the entity that includes SBC and Bellsouth, has won sizable deals with the large enterprise companies. For instance, it recently won a $1 billion deal with General Motors (GM). It's also a dominant provider to large businesses, helped by its ongoing billion dollar investments to expand its global network.
Qwest, ranked 2 STARS (sell), is the third-largest wireline operator in the U.S., after Verizon and AT&T. It has been more focused on building out its services for small and midsize business, and regional businesses. If Qwest does win acceptance into the Networx contract, Rosenbluth believes it will likely win a smaller piece of the pie compared to Verizon and AT&T's share.