AT&T jumped aggressively into the merger and acquisition frenzy, announcing late Friday plans to acquire Leap Wireless for about $1.2 billion, or $15 per share. Analysts noted that with Leap’s substantial debt load the total price is in excess of $4 billion. Leap’s stock (LEAP) was trading at just under $8 per share at close of business Friday.
AT&T said the proposed transaction will include all of Leap’s stock and wireless properties, including licenses, network assets, retail stores, approximately five million subscribers and Leap’s $2.8 billion of net debt. AT&T added that Leap shareholders would also receive a “contingent right entitling them to the net proceeds received on the sale of Leap’s 700 MHz A-Block spectrum in Chicago, which Leap purchased for $204 million in August 2012.” That spectrum was part of a swap with Verizon Wireless announced in late 2011.
The main component of the deal for AT&T is likely Leap’s substantial spectrum holdings, which include 1.9 GHz and 1.7/2.1 GHz spectrum licenses covering approximately 137 million potential customers. AT&T has been on a spectrum buying spree as of late following its failed attempt to acquire T-Mobile USA in 2011. Those spectrum deals have included 700 MHz, 1.7/2.1 GHz and 2.3 GHz spectrum licenses.
Mosaik Solutions put together a map showing the combined spectrum holdings of AT&T and Leap.
AT&T is also looking to shutter its legacy operations by 2017 in an attempt to re-farm spectrum in the 850 MHz and 1.9 GHz band to support its move into the LTE space.
“We will manage this process consistent with previous network upgrades and will transition customers on a market-by-market basis from our Global System for Mobile Communications (GSM) and Enhanced Data rates for GSM Evolution (EDGE) networks (referred to as 2G networks) to our more advanced 3G and 4G networks,” the carrier noted in a 10-Q filing with the Securities and Exchange Commission last year. “We expect to fully discontinue service on our 2G networks by approximately January 1, 2017. Throughout this multi-year upgrade process, we will work proactively with our customers to manage the process of moving to 3G and 4G devices, which will help minimize customer churn.”
AT&T said it planned to retain Leap’s Cricket brand, with plans to expand coverage and capabilities by including access to AT&T Mobility’s network. AT&T Mobility recently unveiled its Aio Wireless service targeting the same market segment as Leap. The Aio Wireless service also joined AT&T Mobility’s legacy GoPhone prepaid service. AT&T Mobility lost 184,000 direct prepaid customers during the first quarter of this year, which it blamed on slowing GoPhone sales. For all of 2012, AT&T Mobility managed to attract only 128,000 new direct prepaid customers, which was down significantly from the 674,000 direct prepaid customers added in all of 2011.
T-Mobile US, which recently closed on its acquisition of Leap rival MetroPCS, has so far decided to continue offering the MetroPCS brand, going so far as to expand that platform’s coverage to T-Mobile US’ HSPA+ and LTE networks. This move was helped somewhat by the fact that both operators relied on the 1.7/2.1 GHz spectrum band to support LTE customers.
AT&T is expected to see a more challenging network integration program with Leap as legacy operations run across different technologies – GSM/HSPA-based for AT&T Mobility, CDMA-based for Leap. Across their LTE offerings, AT&T currently relies on its 700 MHz spectrum assets, while Leap’s limited network runs across its 1.9 GHz and 1.7/2.1 GHz bands.
Leap for its part has been struggling to compete in the market as both larger operators and smaller mobile virtual network operators have aggressively targeted the no-contract, unlimited services space pioneered by Leap’s Cricket service. The carrier lost just over 93,000 customers during the first quarter of this year, and nearly one million customers over the past 12 months. Last year, Leap committed $900 million to carrying Apple’s iPhone products in a move to remain competitive, only to see slow sales of the products.
The carrier has also stagnated on plans to rollout LTE services, and was set to announce a nationwide LTE roaming agreement with Sprint this summer.
Regulatory challenges
One hurdle for AT&T could be government regulators that seem keen on maintain competition outside of the nation’s two largest operators, AT&T Mobility and Verizon Wireless. The government struck down AT&T’s attempt to take out No. 4 carrier T-Mobile USA, citing competitive concerns, but was good with the recent T-Mobile USA-MetroPCS deal that combined the nation’s No. 4 and No. 5 carriers, while also more recently giving the go-ahead to Sprint’s acquisition of its subsidiary Clearwire, which was the nation’s No. 6 facilities-based operator.
AT&T is in the process of acquiring regional operator Atlantic Tele-Network, which was announced earlier this year for $780 million. That deal includes spectrum license in the 700 MHz, 850 MHz and 1.9 GHz bands, as well as Atlantic Tele-Network’s approximately 585,000 customers. That deal is currently at day 129 in the Federal Communications Commission 180-day transaction time clock.
AT&T’s plans to maintain and bolster Leap’s Cricket brand could go a long ways to convincing regulators that there will not be a reduction in competition should the deal be approved.
Another positive for AT&T could be the impending election of new FCC Chairman Tom Wheeler to replace recently departed chairman Julius Genachowski. Wheeler is seen by many as being more in-tune with the needs of the wireless industry having served as president and CEO of industry trade association CTIA. One of those needs, and something Wheeler talked relentlessly of as head of CTIA, was the need for carriers to have access to more spectrum.
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