With the need for wireless spectrum at a seeming all time high, the future of Leap Wireless is on the minds of many. The regional carrier posted fourth quarter financial results showing continued struggles for the no-contract operator and a new focus on generating free cash flow. This indicates to many that the carrier is looking to streamline its financial position to make it more attractive for strategic alternatives.
As part of its fourth quarter financial announcement, Leap noted a significant cut in capital expenditures for 2013, cuts that appear to be impacting its planned LTE rollout. That network is stuck at around 21 million potential customers covered, with is less than one-fourth of its 3G footprint. Leap management said it “may” add LTE coverage to an additional 10 million pops this year. That investment could be of up to $100 million … or not.
“We are carefully evaluating every capital project and will continue to spend only on those projects that provide the most benefit to our customers,” said Perley McBride, EVP and CFO of Leap. “We understand that was a lower customer base we cannot simply sustain our current spending levels, so we must remain sharply focused on continued reductions in our cost structure, even as we work harder to deliver a great customer experience.”
Instead of funding such operations itself, Leap struck a nationwide LTE roaming agreement with an unnamed operator that should allow Leap to more cost effectively grow its LTE offering. Leap has a history of such plans, having been one of the first carriers to sign up for LightSquared’s attempt to rollout a wholesale LTE network, before signing a similar arrangement with Clearwire. Leap currently has a 3G roaming agreement with Sprint Nextel. Leap said it expects to have devices compatible with its roaming plans during the second half of the year.
Further pressuring Leap is the move by rival MetroPCS in signing a deal to be acquired by T-Mobile USA. The deal is expected to fortify T-Mobile USA’s spectrum position and take advantage of MetroPCS’ already network-wide LTE deployment.
Leap management noted that spectrum deals constructed in 2012 bolstered its depth by an average of 6 megahertz, leaving the carrier with an average spectrum depth of 23 megahertz across its markets. That depth is now spread across a small footprint, which has shrunk from more than 180 million licensed pops two years ago to less than 140 million licensed pops today.
“We’re in the enviable position of having an attractive, valuable and more focused spectrum portfolio,” said CEO Doug Hutcheson in an investor call.
“Despite these challenging Q4 results, we view the strategic announcements during the quarter of a national LTE roaming partner and cautious LTE capex guidance as in line with our thesis that Leap will be primarily focused on [free cash flow] generation and maximizing the value of its assets in 2013,” noted Wells Fargo Securities senior analyst Jennifer Fritzsche, in a research note.
Fritzsche noted in a recent research paper that Leap’s spectrum assets alone were worth conservatively at around $2.6 billion, and that the carrier’s shares were valued at between $13.50 and $20 per share. Leap’s stock (LEAP) dipped more than 8% on Wednesday to $5.61 per share.
One potential buyer could be Sprint Nextel, which mentioned this week that it was on the lookout for additional spectrum assets. The carrier is currently in the process of acquiring the remaining stake in Clearwire and its vast 2.5 GHz spectrum holdings, spent $480 million on spectrum and assets late last year from U.S. Cellular and is looking to add to its financial position through a pending $20 billion acquisition attempt by Japan’s Softbank.
A deal with Sprint Nextel would also likely not raise the ire from regulators that could arise should one of the nation’s two largest operators – Verizon Wireless and AT&T Mobility – attempt to acquire Leap.
Core focus; device financing
Leap also said it was discontinuing its PayGo prepaid offering, citing the increased churn generated by the service. This move in connection with its previous move to de-emphasize its mobile broadband users leaves the carrier focused on its core hybrid prepaid offer. Those two offerings represent approximately 700,000 customers across the carrier’s base, which it seems ready to lose as it noted during its financial call that analysts should focus on the approximately 4.6 million customers that are part of the carrier’s core offerings. Leap’s management said that it plans to narrow its customer acquisition targets, which will likely lead to slower growth for 2013, but allow the carrier a greater chance to generate positive cash flow.
While trying to stay competitive in the market, Leap also said it was looking at ways to implement financing models for handsets to compete with similar moves by larger rivals. This model is seen as especially cost sensitive to no-contract providers that are often tasked with providing higher upfront device subsidies to bring pricing down to attractive levels. However, without a contract to tie a consumer to paying back that subsidy, there is little financial room for error.
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