Wednesday, August 28, 2013

AT&T Eyes Leap Wireless - Analyst Blog

Telecommunication behemoth AT&T Inc. (T) has placed a proposal to take over the largest prepaid wireless operator in the U.S. – Leap Wireless International Inc. (LEAP) – for $1.2 billion. Including Leap's net debt of $2.8 billion, as of Apr 15, the value of the deal is around $4 billion.

Leap – which operates under the brand name of Cricket – has an extensive network that spans 35 U.S. states covering almost 96 million people. Supported by an employee base of 3,400, Leap offers both a 3G CDMA network as well as a 4G LTE network.

With $15 per share payment in cash, AT&T will take possession of all of the smaller rival's stock and wireless properties that include licenses, network assets, retail stores and nearly 5 million subscribers. This acquisition will also entitle AT&T to gain control over Leap's spectrum in the PCS and AWS bands covering 137 million people, thereby enhancing the spectrum base of the former. The company plans to use the unutilized spectrum of Leap to expand its 4G LTE deployment, rendering more capacity, better network connectivity and increased mobile Internet usage.

Interestingly, this deal enables Leap shareholders to have a contingent right to the net proceeds gained on the sale of the firm's 700MHz spectrum in Chicago. Leap had purchased the spectrum in Aug 2012 for $204 million.

Following the completion of the deal, AT&T will continue to serve Cricket customers under the existing brand. AT&T, via its industry-leading 4G LTE mobile network and Cricket's distribution channels, aims to spread Cricket's footprint to additional U.S. cities.

Although 29.8% of Leap's outstanding shareholders have agreed to vote in favor of the acquisition, the deal is yet to be reviewed by the Federal Communications Commission and the Department of Justice. The transaction is expected to be completed within the next six to nine months.

We apprehend that this deal will be thoroughly scrutinized by the regulatory b! roads, which remain skeptical about the over-concentration of wireless spectrum in the hands of the top market players – AT&T and Verizon Communications (VZ).

Apart from improving its spectrum position within the industry, this deal will endow AT&T with a stronger pre-paid business line, sharper competitive edge, more customer care service facilities, low-cost data plans and robust financial resources.

This is AT&T's second attempt in the last two years to acquire a wireless carrier. In 2011, the company was toying with the idea of buying T-Mobile USA (TMUS) for $39 billion. However, the deal failed to materialize due to non-approval by U.S. regulators.

Acquisitions and mergers seem to be the current trend within the telecom industry. In May, T-Mobile USA acquired MetroPCS Communications Inc, while in early July Sprint Nextel Corp. (S) and Japanese telecom company SoftBank announced the successful completion of their merger.

AT&T currently holds a Zacks Rank #3 (Hold).

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