The frenzy of consolidation sweeping the wireless industry may not be over as an industry research firm recommended that some nationwide operators could see both long- and short-term benefits by acquiring keenly focused regional players.
Citing the possibility of increased penetration into key Hispanic markets and the ability to pursue a sub-brand service offering, research firm the Yankee Group recommended that Verizon Wireless acquire either regional wireless operator Leap Wireless International Inc. or MetroPCS Inc.
“Leap and MetroPCS are strong in the Hispanic and credit-challenged markets, two relatively untapped markets in the wireless marketplace,” explained Adam Zawel, Yankee Group research director.
Zawel noted that in a recent survey, the Yankee Group found that MetroPCS led the industry with 23 percent of its customers claiming that at least one head of household was of Hispanic origin. The same survey found that nearly 8 percent of Leap’s customers made similar claims, though Leap has said that its own surveys have found that 19 percent of its customers are Hispanic.
The Yankee Group survey found that only 4.4 percent of Verizon Wireless’ customers claimed to have at least one head of household of Hispanic origin.
Zawel also noted that either Leap or MetroPCS would provide Verizon Wireless with a sub-brand that the carrier could use to further penetrate under-served markets. Verizon Wireless is attacking those markets today through aggressive family-plan initiatives and its Inpulse prepaid service.
“By going down market with a no-frills sub-brand, Verizon would signal to competitors a path for service segmentation, rather than a price war,” Zawel said.
Zawel added that Leap was an attractive draw for the less affluent, with nearly half of Leap’s subscribers coming from households earning less than $25,000 per year.
“Verizon Wireless is too expensive for many of these customers, especially when the carrier only offers them prepaid service after they fail credit tests,” Zawel said.
Leap would provide Verizon a more robust offering in Oklahoma and Arkansas, where Verizon has been hampered by spectrum constraints, but where Leap “maintains a healthy leadership position,” Yankee said. Verizon relies on roaming partner Alltel Corp. to offer services in a number of markets in the Southeast.
Others noted that Verizon Wireless likely will continue to capitalize on its roaming arrangements with Alltel, though a potential Leap bid is not out of the question.
“Alltel’s presence does not mean that Verizon wouldn’t be at all interested, but its attractive roaming deal with Alltel does mean that the company is unlikely to pay a premium for the assets any time soon,” noted Phil Cusick, Bear, Stearns & Co. Inc. research analyst.
Verizon Wireless announced roaming agreements earlier this year with both Leap and MetroPCS that gave both regional operators the ability to offer nationwide services to their customers using Verizon Wireless’ network. Those deals also included Verizon Wireless acquiring spectrum in several markets.
Leap offers service in 39 markets across the country and won13 licenses at auction. MetroPCS acquired six licenses at auction, including a 10-megahertz license for Los Angeles.
Leap and MetroPCS’ spectrum positions also would help bolster Verizon Wireless’ ongoing rollout of CDMA2000 1x EV-DO high-speed wireless data services.
One hurdle for Verizon Wireless could be Leap’s current market value, which stands at around $1.9 billion. Leap was available for a steal prior to a bankruptcy and reorganization that concluded last year, but was able to shed nearly $2 billion in debt through the process.
“We think it would be a hard sale at the current price,” Cusick noted.
Cusick also explained in an earlier report that Leap’s business model could prove challenging for potential suitors. Leap’s no-contract offering has generated significantly higher churn results than traditional operators, and its flat-rate service plans depend on low acquisition and operational costs.
“Other CDMA companies should be most willing, but Verizon is unlikely to be interested in the customer base, Sprint doesn’t need the spectrum or equipment (especially after the Nextel merger), and U.S. Cellular is unlikely to pay Leap’s current multiple for the carrier,” Cusick wrote. “Finally, Alltel has significant overlap and has found this business model unattractive in the past. We believe that Verizon and Alltel are the most likely buyers, but are unlikely to bid at current prices.”
Consolidation among GSM operators remains more muddled.
Most analysts see little spectrum headroom for Cingular Wireless L.L.C. following its recent acquisition of AT&T Wireless Services Inc.
That leaves T-Mobile USA Inc. as the main protagonist for large-scale GSM consolidation as the carrier has been singled out as having the most spectrum needs and deepest pockets. The most likely candidate for a potential T-Mobile USA acquisition remains SunCom Wireless Holdings Inc., which following the untangling of its affiliate agreement with AWS, has substantial spectrum holdings in the Southeast and Puerto Rico, where T-Mobile USA is spectrally deficient.
T-Mobile USA also could benefit from closer ties with other regional GSM operators like Dobson Communications Corp. and Centennial Communications Corp., but those operators would not provide T-Mobile with the spectrum it needs to compete against its larger competitors in the nation’s top markets.
A more likely spectrum target for T-Mobile USA remains upcoming auctions.
One potential wild card for smaller GSM operators is Alltel, which following its pending acquisition of Western Wireless Corp. will inherit an established GSM presence in rural areas. Alltel has said it will continue to support the GSM services through roaming agreements with Cingular and T-Mobile USA, but Alltel’s services could be further strengthened through consolidation.
