Analysis of AT&T’s Bid to Acquire Leap Wireless

Proposed Deal:

After the close of business on July 12th, AT&T announced the planned acquisition of Leap Wireless for $1.19B, or $15 per share in cash. Leap sells pre-paid wireless service under the Cricket brand name.  The press release is at:|financial

Our Opinion:

This deal seems to be all about acquiring additional spectrum at a fairly high price. AT&T isn’t just paying $1.2 billion for Leap – a premium nearly double Leap’s closing price Friday – it’s taking on $2.8 billion in Leap debt. That’s $4 billion to acquire regional spectrum, much of which isn’t in areas where AT&T needs the capacity.

Excluding adjustments, the total deal size is $4.0B (including $2.8B in net debt as of April 15, 2013). AT&T is also providing shareholders with a “contingent value right” (CVR)for net proceeds of the sale of Leap’s 700 MHz A block spectrum covering Chicago, IL.

AT&T holds at least 26 MHz of spectrum, and in densely populated cities that number grows to more than 70 MHz and in many cases over 100 MHz.  Since the 700MHz spectrum auction failed over 5 years ago (, this author has claimed that AT&T and VZW have a duopoly in the U.S. That’s because of the vast amounts of spectrum they own or control. With more spectrum as a result of this deal, AT&T would have more capacity to build bigger mobile data pipes and thereby gain a potential competitive advantage over its remaining rivals, e.g. VZW, Sprint and T-Mobile.

“Immediately after approval of the transaction, AT&T plans to put Leap’s unutilized spectrum–which covers 41 million people–to use in furthering its 4G LTE deployment and providing additional capacity and enhanced network performance for customers’ growing mobile Internet usage,” the carrier said in its press release.

AT&T seems to have concluded that the spectrum market is now so tight that airwaves — so long as they’re in the right band — are worth any price. It’s the same calculation that T-Mobile made when it merged with MetroPCS, paying Metro shareholders $1.5 billion and giving them a quarter of the combined company.

“The combined company will have the financial resources, scale and spectrum to better compete with other major national providers for customers interested in low-cost prepaid service,” the AT&T press release stated. ” Cricket’s employees, operations and distribution will jump start AT&T’s expansion into the highly competitive prepaid segment.”

But there’s no real gain in AT&T’s LTE footprint. Leap Wireless is just getting starting on its LTE rollout, but the map is still telling. Except for a few towns on the U.S.-Mexico border and a few fingers of coverage outside Tuscon, Ariz., and Houston, there’s nowhere Leap has an LTE network where AT&T doesn’t already have one.

Other Opinions

1. GigaOM: “AT&T is paying a ridiculous price but it probably feels it has no choice.” Continuing, “Today, mobile carriers are buying up their competitors for a single asset only, spectrum. The big four are becoming chop shops, buying up smaller players and stripping them to get at their airwaves.”

A bird’s eye view of the AT&T-Leap Wireless merger

2. FBR’s David Dixon wrote in an email:

Key unknowns are the likely spectrum buyer and at what valuation.
Recall that this spectrum is:
(1) subject to interference issues in the short run and
(2) primarily owned by Verizon in major urban markets. Verizon built its initial LTE network using 700 MHz C block spectrum (and a band plan that does not allow for roaming) augmented by 1,700 MHz AWS spectrum using the latest technology to provide similar coverage plus capacity.

AT&T is acquiring all stock and wireless assets, which consist of the Cricket brand, spectrum, wireless network, 5,000 retail stores, and 5M prepaid subscribers.

AT&T has a voting agreement with shareholders that own 29.8% of outstanding LEAP shares. The FCC and the DOJ will both review the deal, which AT&T expects to close in six to nine months. Other key points about this deal:

* Spectrum alignment and strengthening T-Mobile USA asset drove the deal. Given public DOJ comments supporting a four-player wireless market and plans to restrict AT&T or Verizon in the incentive auctions, AT&T was wise to seek spectrum to increase leverage on Sprint and potentially crimp T-Mobile US in key markets. Recall that Leap’s spectrum holdings cover the PCS and AWS bands covering 137M POPs.

* Deal will face intense scrutiny from regulators. In recent transaction reviews, the DOJ has forced spectrum divestitures to improve T-Mobile US’ 4G LTE competitive position. We anticipate that, despite AT&T’s planned use, regulators may force divestitures in certain markets (possibly Washington, D.C., Philadelphia, and Detroit).

* Despite low termination fee, do not expect a counter-bidder to emerge. We do not believe that T-Mobile (arguably the most interested in Leap) can afford to counterbid a $15 per share all-cash bid. Sprint is a potential candidate after having closed Clearwire, while Verizon appears focused on 1.7 GHz LTE.

* CVR may be worth less than expected. No obvious near-term bidder exists for the spectrum up for sale in Chicago. Verizon holds the vast majority of 700 MHz A block spectrum in major markets. Sprint recently purchased U.S. Cellular’s Chicago operations, while T-Mobile is using AWS spectrum for LTE. Interference concerns persist. We think a spectrum sale above Verizon’s implied purchase price is less likely; we are valuing the CVR at $1 per share.

3. Fierce IPTV: AT&T’s $1.19B acquisition of Leap Wireless will boost U-verse

The deal “will be a major cog in Project Velocity IP (Project VIP), the carrier’s multibillion-dollar wireless/wireline expansion of U-verse.”

4.  WSJ: AT&T Leaps in T-Mobile’s Way

But a closer look at Leap’s spectrum suggests the deal may be more of a jab at T-Mobile than a boost to AT&T. More than 60% of Leap’s spectrum resides in a band where T-Mobile has a major presence and AT&T, only a smattering of licenses, according to Moffett Research. Buying Leap thus keeps its highly complementary spectrum out of T-Mobile’s hands.

And AT&T may have a growing reason to do so. T-Mobile Chief Executive John Legere said last week that his company’s “porting ratio” against AT&T—customers switching to T-Mobile from AT&T over those doing the reverse—had shot up to 1.75 from 0.59 in the first quarter as a result of new contract-free service plans announced in March.

A desire to lock up Leap could explain why AT&T is paying more than eight times 2013 earnings before interest, tax, depreciation and amortization. Leap’s Ebitda is forecast to fall 7% in 2014 as its subscriber base shrinks. By comparison, AT&T trades at 6.3 times 2013 Ebitda. And while the price tag may be small relative to AT&T’s size, it could strain further its already stretched ability to fund dividend growth out of operating cash flow, according to BTIG Research.

In AT&T taking this leap, hobbling T-Mobile seems the primary goal.