Leap nixes MetroPCS’ merger offer

Leap Wireless International Inc. rejected a merger proposal from MetroPCS Communications Inc., saying that the offer fails to fully account for Leap’s growth prospects, undervalues Leap’s business, and favors MetroPCS’ shareholders over those of Leap.
Leap made its response-a letter from CEO Doug Hutcheson to MetroPCS chairman CEO Roger Linquist-public, in the same way that MetroPCS made its offer letter public, and categorized MetroPCS’ offer as “completely inadequate in a number of critical areas.”
The fiery letter went on to enumerate the failings of Metro PCS’ offer and its business as compared with Leap.
“While we recognize the progress that MetroPCS previously made in launching . markets, we have concerns about your ability to successfully grow your business in line with shareholder expectations,” Hutcheson wrote, citing what he said were delays in MetroPCS’ launch of its Los Angeles market. MetroPCS has denied that it has experienced delays in launching the market.
Hutcheson also said Metro has “only recently begun to contemplate meaningful broadband activities”-an especially pointed comment as Leap today made a separate announcement detailing the launch of its Cricket Wireless Internet Service, a new unlimited, flat-rate broadband data service available in Nashville, Tenn.; and Albuquerque and Santa Fe, N.M.
While MetroPCS had claimed in its offer letter that since its own initial public offering, Leap’s stock had been trading up on the basis of speculation that the two companies might merge, Leap responded that the offer undervalued its stock and “given the short trading history of your stock, we are concerned about how your future performance will evolve relative to the external expectations to which you are now subject.”
Hutcheson said that Leap’s “team has repeatedly tried to engage in discussions with you in the past regarding merger possibilities as well as other possible strategic collaborations. . All of our varied and numerous efforts were to no avail. . Given our broad and repeated efforts, we were surprised by your sudden offer and the fact that you decided to make the offer publicly before even attempting to enter into substantive discussions with us.”
Raymond James analyst Ric Prentiss said that the tone of the letter was surprising and “it may be difficult for both sides to reach a merger accord before the Auction 73 quiet period begins, which we believe will be by mid-November.”
“We hope Leap will be reasonable in how much it expects to receive in a merger, as we believe shareholders of both Leap and [MetroPCS] would benefit from a combination,” Prentiss added.
Hutcheson’s letter also noted the timing of the offer, which comes ahead of the highly anticipated 700 MHz auction, and concluded that Leap “will not be pressured into agreeing to an inadequate takeover proposal in order to satisfy an external deadline that does not meet the needs of our shareholders.”
In a research note, Lehman Brothers analyst Brett Feldman concluded that “this is not a final rejection, but the next volley in what we expect to be continued negotiations. In our view, a deal between these companies is still likely. More specifically, we believe that a deal will be reached prior to Thanksgiving.”
Both Leap and MetroPCS’ stocks were down around 2% on the news of the Leap’s response.