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Thursday, Mar 30, 2023

AT&T Sold on Value Of Leap’s Spectrum

S. Doug Hutcheson

Investors continue supporting the proposed sale of San Diego-based Leap Wireless International Inc. to AT&T last week, pushing up the prepaid cellphone provider’s stock more than $2 above the $15 cash offer price.

That offer, an 88 percent premium to Leap’s stock price before the sale was announced July 12, would translate to AT&T paying about $1.2 billion for the company that sells its service under the Cricket brand. Including Leap’s debt of $2.8 billion, the real cost to AT&T is about $4 billion.

Even with Leap investors getting an additional payout after the sale of spectrum licenses in the Chicago area are figured in, several stock analysts say that’s a steep price for the company, which was spun off from Qualcomm Inc. in 1998.

“We believe AT&T is overpaying for Leap’s spectrum,” said Kevin Manning, an analyst with BMO Capital Markets in New York. “We are surprised at AT&T’s willingness to pay so much above market rates for spectrum.”

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Manning estimated AT&T was actually paying $5.25 billion for Leap, including Leap’s operating and capital leases that total $1.6 billon.

In its reasons for the purchase, AT&T said “The combined company would have the financial resources, scale and spectrum to better compete with other major national providers for customers interested in low-cost prepaid service.”

“Cricket’s employees, operations, and distribution will jump-start AT&T’s expansion into the highly competitive prepaid segment,” said AT&T.

Counteroffers Unlikely

The real reason why AT&T made such a high bid, says Manning and several other analysts, is to prevent rival carrier T-Mobile from buying it.

“We believe AT&T is buying (Leap’s) spectrum so T-Mobile can’t, although we believe the deal is unlikely to have much, if any, impact on T-Mobile,” Manning said.

William Power, an analyst with Baird Equity Research in Dallas, said in a report the valuation AT&T gave Leap seems rich “though this is another example of T (AT&T’s stock ticker) grabbing spectrum wherever it can to enhance its long-term portfolio.”

While Leap’s rising stock price would indicate a possible counteroffer from T-Mobile or another telecom, most analysts say that’s unlikely.

“Given the frenzy of recent wireless deal making, it’s possible that Sprint, T-Mobile, or others could have an interest but given the high valuation for largely midmarket spectrum, we wouldn’t count on a higher bid,” Power said.

Lackluster Performance

Several analysts noted Leap’s lackluster financial performance and net loss of customers, which should mean a much lower offer price.

In the past five years, Leap has consistently increased its revenue, but just as consistently posted net losses. Last year, it reported a net loss of $187 million on $3.1 billion in revenue. That compared with a net loss of $318 million on $3.07 billion in revenue in 2011.

In the first quarter, Leap said it lost a net 93,000 subscribers compared with a net gain of about 258,000 customers during the like quarter of 2012. At March 31, Leap said its customer base was 5.2 million, down 16 percent from the like quarter of last year.

Although the Cricket model is attractive because of the prepaid nature of the service, its target customers, generally lower income residents of urban areas, can be fickle and switch their services if they’re offered a better price, analysts note.

“Leap’s subscribers are all low ARPU (average revenue per user or what an average user spends), high churn, prepaid subscribers,” said Manning.

Subject to Regulatory Approval

And while AT&T said it plans to retain the Cricket brand, use its distribution channels and expand its presence in more U.S. cities, Manning says it will likely close Cricket stores and discontinue the brand after the deal closes, which is expected in six to nine months.

Neither AT&T nor Leap had any comment on the proposed transaction, which is subject to regulatory approval from the Federal Communications Commission and the Department of Justice. Nor are the companies saying anything about what’s in store for Cricket’s headquarters office and its administrative staff of about 420 people. The company occupies a single building next to the confluence of Interstate 805 and state Route 52 near Kearny Mesa. Leap’s total employment is 3,400, down from 3,800 earlier this year.

In September 2007, Leap’s board nixed an offer to sell the business to its prepaid rival Metro PCS, which offered about $5 billion on an aggregate basis. Leap’s board said then the offer was far too low, and Metro didn’t increase its bid.

Last year, Metro PCS, based in Dallas, was acquired by T-Mobile, a unit of Germany’s Deutsche Telecom, for about $1.5 billion.


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