NEW YORK-Leap Wireless International Inc., San Diego, sold $1.245 billion in debt and equity securities Feb. 17, a substantial sum that was more than it expected to raise.
Leap, which Qualcomm Inc. spun off in September 1998, launched its Cricket brand Code Division Multiple Access service in Chattanooga, Tenn., in March 1999 and in Nashville, Tenn., last month.
The company plans to use net proceeds of the debt and add-on stock offerings to repay borrowings under a credit agreement with Qualcomm, to finance capital expenditures and new service launches, primarily in domestic markets, to pay for pending acquisitions and for other general corporate purposes.
Two days before Leap’s securities sale, the Federal Communications Commission approved Cricket Communications’ acquisition of 11 licenses in Tennessee from Chase Telecommunications Holdings Inc. and one license in Dayton, Ohio, from PCS DevCo. Collectively, these licenses cover a population of 7.8 million.
Specifically, the capital infusion will fund the launch of Cricket service in 25 U.S. markets, covering about 19 million people. The schedule calls for Leap to launch Cricket service or build networks in 15 cities covering 7 million people by year-end, according to Standard & Poor’s Corp.
“In addition to proceeds from the offerings, the company will draw on vendor facilities from Lucent (Technologies Inc.) and (L.M.) Ericsson totaling about $1.1 billion,” Greg Zappin, telecommunications analyst for Standard & Poor’s, said.
The vendor financing is secured by “the stock and assets of all of Leap’s U.S. operating and licensed subsidiaries,” said Tom Marshella, managing director, and Marcus C. Jones, senior analyst, for Moody’s Investors Service’s corporate finance group.
In late January, Leap amended its preliminary prospectus for February’s secondary stock sale, raising the expected share number to 4 million from 3 million. At that time, the company’s share price was $58.75.
The Feb. 17 stock offering, for which Morgan Stanley Dean Witter, New York, was lead manager, comprised 4 million shares priced at $88 each, raising gross proceeds of $352 million.
Leap also contemplated raising $525 million from the private placement of 10-year notes. Instead, the two-tranche debt deal it placed concurrently with the equity sale totaled $893 million: $225 million in 12.5-percent senior notes and $668 million in 14.5-percent senior discount notes, both including warrants to purchase common stock.
Cricket Communications Holdings Inc., Leap’s domestic subsidiary holding company, is the guarantor of the notes.
Moody’s and Standard & Poor’s assigned low-tier, speculative grade ratings of Caa2 and CCC, respectively, to the debt issue.
Leap’s all-prepaid, all-local-calling strategy has worked well so far in Chattanooga, the rating-agency analysts said. In its first 10 months of operation, Cricket achieved a 7-percent market share, gaining 22,000 subscribers who average 1,000 minutes of use per month.
“The Cricket business plan is quite unique, and the timing of its entry … is propitious …,” said Marshella and Jones of Moody’s However, as Leap launches the brand across the rest of its markets, competing carriers are quite likely to defend their market shares more aggressively and target the same demographics to which Cricket is appealing, they added.
“While the networks of established wireless carriers were not designed to handle the traffic volume Cricket’s Chattanooga subscribers are generating, this can be solved with time and money,” Marshella and Jones said, noting recent FCC announcements regarding the promotion of calling party pays will give established carriers a new tool to help them compete to capture those new to wireless.
The Moody’s analysts also noted that Leap “has expressed interest in acquiring further spectrum in the [United States],” for which it would seek to raise additional equity.
