AT&T Makes a Leap of Faith

AT&T Makes a Leap of Faith

The great carrier consolidation of 2013 continues!

There had always been speculation of what a great fit Leap Wireless would be with MetroPCS. Instead, MetroPCS decided to pair with T-Mobile in a reverse merger that would make the magenta carrier publicly traded in the U.S. for the first time. That was after AT&T failed to acquire T-Mobile, when the Department of Justice vetoed the deal years ago. Meanwhile, SoftBank has enmeshed itself with Sprint and Clearwire, despite DISH Network's efforts to cut in on the action.

Now AT&T wants to go with Leap, acquiring the small pre-paid carrier in a $1.2 billion deal that values Leap at $15 per share. Ma Bell will be paying it all in cash, and will get all of Leap's licenses, network assets, retail stores, and roughly 5 million subscribers. Leap's Cricket brand will continue to fly under AT&T's umbrella, but Cricket customers will soon be able to access AT&T's broader LTE network as well.

In no uncertain terms, this deal is very much about spectrum. The 5 million new subscribers alone aren't a game-changer compared to AT&T's current retail customer base of 77.9 million (excluding wholesale connections and connected devices). It will, however, substantially add to AT&T's prepaid subscriber base, which was just 7.1 million at the end of Q1.

The transaction includes valuable PCS and AWS spectrum bands that cover 137 million people and will help AT&T boost its LTE capacity. Leap investors will also get a contingent right that entitles them to some of the net proceeds from the sale of a 700 MHz "A Block" spectrum license in Chicago. Leap bought that chunk last August for $204 million.

There are a few interesting plot twists. Leap has traded as high as $17.25 this morning, over $2 higher than the proposed deal price. That premium is also related to the aforementioned spectrum sale that Leap investors will get a piece of, which is valued at an estimated $2.20 per share. It's also possible that investors are hopeful of an unsolicited rival bid coming in, which is what happened in the Softbank/Sprint/Clearwire/DISH situation.

It's also true that regulators aren't too keen already on the idea of AT&T growing its spectrum position even further, so they could potentially move to block the merger like they did when Ma Bell tried to scoop up T-Mobile in 2011. AT&T may be willing to sell off spectrum in certain markets to ease regulatory concerns and improve the chances of approval.

Consumer advocacy group Public Knowledge has already spoken out against the deal. In a statement, Public Knowledge Senior Vice President Harold Feld said, "AT&T already has more wireless capacity than it needs to serve its customers, and it should focus on using what it has rather than continuing to try to buy out competitors."

There are several hurdles to clear for AT&T to acquire Leap, but Ma Bell has faith that the deal will close in six to nine months.

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