September 4, 2007 3:11 PM PDT
MetroPCS plans to take a Leap
On Tuesday, MetroPCS, which went public in April, said it would swap more than $5 billion worth of stock to acquire Leap Wireless.
"We're looking to create a fifth national carrier," Roger Linquist, MetroPCS CEO, said during a conference call Tuesday with investors. "By acting now, we can maximize the potential synergies between the companies."
MetroPCS made its offer public in a letter sent to Leap Wireless' top executives on Tuesday. As part of the proposed deal, MetroPCS is offering 2.75 of its shares for each outstanding common share of Leap. This represents a value of $75.05 based on Friday's closing price. Because it's a stock deal, no cash would be exchanged. But the terms of the deal would give MetroPCS control over about 65 percent of the new entity with Leap Wireless having only about 35 percent control of the company.
Leap Wireless spokesman Greg Lund said his company is reviewing the offer sent by MetroPCS and has no further comment at this time.
Some analysts, however, say the company is likely amenable to a merger--although they suspect Leap will hold out for a bigger stake in the combined entity.
Linquist said the companies have been in talks for four years about a possible deal, but he decided to take the proposal public to help move the process along more quickly. He hopes the transaction could be completed in early 2008.
A marriage between the two regional, low-cost operators has been rumored for months. Linquist admitted that the question came up several times during MetroPCS' meetings with potential investors before it went public in April. Wireless experts agree the two companies make a perfect match that could create some pricing disruption in the wireless market.
"Competition would definitely increase particularly for the national carriers," said Michael Nelson, a telecommunications analyst at the Stanford Group. "Consumers who wouldn't consider either of these operators separately because their networks are too small, could be attracted to them now with a bigger network."
Indeed, combining the companies could double MetroPCS' footprint with very little overlap among geographically different areas. MetroPCS tends to offer service in more urban areas, whereas Leap has concentrated on rural and suburban markets.
The companies also share similar business models, targeting low-income or cost-conscious subscribers with unlimited calling plans for a flat fee. And unlike the four nationwide carriers, neither MetroPCS nor Leap requires subscribers to sign contracts. And because the companies also use the same network technology, CDMA (code division multiple access), integration would be much easier from a technical standpoint.
Separately, MetroPCS and Leap have been trying to expand their networks, with each provider winning a significant number of spectrum licenses in the Advanced Wireless Services spectrum auction held by the Federal Communications Commission last year.
MetroPCS spent about $1.4 billion on spectrum last year, making it the fourth-highest bidder in the entire auction. Leap spent about $980 million, making it the sixth-highest bidder. T-Mobile, the smallest of the four nationwide operators, was the top bidder in the AWS auction, spending $4.2 billion on spectrum licenses.
MetroPCS is already putting its new spectrum to good use with plans to launch service in Los Angeles this month. And it will launch service in Boston, Philadelphia and New York City in 2008 and 2009, the company has said. Meanwhile, Leap also owns licenses in 35 of the top 50 markets including Chicago, Milwaukee, Minneapolis, Philadelphia, Washington, D.C, and Seattle.Competing as 'superclusters'
Linquist said by the end of the 2009, the companies--with a combined 6.2 million subscribers--would offer service in nine of the top 12 markets in the U.S. And because the companies' footprints are complimentary, a combined MetroPCS-Leap Wireless would be able to build what he called "supercluster" regional networks that would compete head-to-head with the existing nationwide carriers and offer savings of about $2.5 billion.
"We see significant strategic value in combining the networks to form regional superclusters," Linquist said.
With an increased footprint, consumers may look more closely at the unlimited value plans offered by MetroPCS and Leap Wireless. Today, the four major cell phone carriers in the U.S.--AT&T, Sprint Nextel, T-Mobile, and Verizon Wireless--offer bundles of minutes for a fee. If users go over their allotted minutes they are charged. By contrast, MetroPCS and Leap offer unlimited calling plans for a set fee.
Sprint Nextel has already started responding to the threat of the unlimited calling plans offered by regional operators. In parts of Texas and California where MetroPCS operates, Sprint's mobile subsidiary, Boost Mobile, is experimenting with unlimited calling plans. Unlimited by Boost, which is supported by advertising, launched about three months ago and it already has more than 100,000 customers, the company said in a recent press release.
But Nelson said it's unlikely that unlimited plans would be offered on a wide scale by nationwide carriers anytime soon. Today, the average subscriber on a nationwide operator's network uses between 500 and 700 minutes of voice time a month, Nelson said. By contrast, subscribers on MetroPCS' or Leap's networks average about 1,500 to 2,000 minutes a month.
"If voice traffic all of a sudden quadrupled, it would crush their networks," he said.
But Steve Clement, a research analyst with Pacific Crest Securities, also pointed out that MetroPCS and Leap still have a long way to go in terms of matching the footprint and service quality that the largest operators in the country offer today.
"I don't see MetroPCS and Leap ever matching service from Verizon or AT&T," he said. "I'm sure it will cause these carriers some headaches, but it won't be revolutionary."