Leap Wireless Mulls Sale/Merger - Analyst Blog

Unlimited prepaid wireless carrier Leap Wireless (LEAP) is reportedly exploring opportunities for a potential sale or merger with a rival operator. The company has hired Goldman Sachs (GS) and Morgan Stanley (MS) as advisors and formed a three-member special committee to evaluate strategic options and find a potential suitor for Leap. 

While the most likely partner for Leap is its archrival MetroPCS (PCS), other potential candidates are Tier-1 US carriers such as Verizon (VZ) and AT&T (T). MetroPCS, which targets similar consumer demographics as Leap, had made a $5.5 billion all-stock acquisition bid in 2007, which was rebuffed by Leap as too low.
 
A potential deal with MetroPCS makes sense as both operators have similar business model, which are exposed to aggressive price competition. However, the companies share a history of bitter negotiations when it comes to merger talks.
 
Leap has reportedly approached Verizon and AT&T, however, no deal has been reached yet. Top-tier carriers may face tough regulatory hurdles to secure an approval to buy Leap. Verizon and AT&T collectively having more than 60% command over the US wireless market, may have to divest a significant portion of assets in Leap’s markets to secure regulatory approval for the acquisition.
 
California-based Leap, a Qualcomm (QCOM) spin-off, provides digital wireless communication services in 34 states in the US under the “Cricket" brand. The company is one of the prominent players in the low-cost unlimited prepaid wireless market serving roughly 4.7 million customers.
 
However, Leap remains a loss-making entity and contends with a high churn level and declining ARPU (average revenue per user) due to increased customer defection as its larger peers continue to attract subscribers with competitive service plans, greater network coverage and better product offerings.
 
Leap is operating in an intensely competitive low-cost prepaid wireless market. Besides competing directly with MetroPCS, the company remains challenged by the competitive service plans of its bigger rivals, especially Sprint Nextel’s (S) $50 monthly unlimited plan and $45 plan by America Movil’s (AMX) Tracfone. Moreover, recent heavy plan price discounts by Verizon and AT&T have re-ignited competition in the unlimited prepaid space. 

Leap faces challenges competing with top-tier carriers that offer bundled packages to customers and are upgrading their networks to advanced 4G technologies. Moreover, unlike its larger rivals, Leap does not offer advanced feature-rich high-end smartphones. To keep pace with technological changes and remain competitive, the company needs to invest significantly on network technology upgrades, which is expensive. All these factors coupled with burgeoning pricing pressure from competitors have forced Leap to consider a sale or merger. 

Leap’s shares leaped $1.73 (or 13.1%) on February 1, 2010, closing at $14.92. The stock fell by 6 cents (or 0.39%) in after-hours trading. The company’s shares tumbled more than 40% in 2009 due to an intense price war in the prepaid market and concerns over falling ARPU.
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