METROPCS COMMUNICATIONS INC. last week made public a proposal to merge with flat-rate rival Leap Wireless International Inc. in a move that could create a fifth carrier with a national presence and catapult no-contract offerings from the fringe to the spotlight.
So far, Leap has said only that it is reviewing Metro’s proposal letter and declined further comment.
Counseling needed
The fact that Metro made its offer public, rather than pursuing a more private path for a deal, raised a few eyebrows.
Medley Global Advisors wrote in a research note that the “relationship between the two firms [has] been somewhat rocky over the last several years, and [the] public announcement made by MetroPCS may increase the tension between the two companies . the aggressive nature of the public letter has a hostile undercurrent not seen in telecom mergers in years.”
During a call with investors on the potential merger, MetroPCS Chairman and CEO Roger Linquist was peppered with questions on why Metro had taken such a public route with its proposal. Linquist emphasized that MetroPCS’ interest in Leap was no secret and had been the subject of analyst speculation-and discussion between the two companies-for years.
“Quite frankly, it’s been almost four years since we first had discussions with the company about this, so it’s not something that’s going to take anyone by surprise,” Linquist said. He added later, “The fact is that we think getting it in front of the shareholders and management is the most expeditious way to get a deal done. And we’re looking to do this, obviously, and avoid as much delay as possible.”
Later in the call, Linquist said even more strongly that “we want to see this happen now. There’s no reason whatsoever for a delay.”
The offer
MetroPCS sent Leap a letter detailing its offer, which involves a “stock-for-stock, tax-free merger that will create a fifth national wireless carrier.” Each outstanding share of Leap’s stock would be exchanged for 2.75 shares of MetroPCS’ common stock, which MetroPCS said implies a value of $77.89 per share for Leap-and an estimated value of more than $5 billion for the deal. MetroPCS would also take on about $2 billion of Leap’s debt. The merged company would be 65.4% owned by MetroPCS shareholders, and 34.6% owned by Leap shareholders.
MetroPCS also said that it believes Leap’s stock “has traded in part in anticipation of a merger between the two companies” since MetroPCS went public last spring.
The news sent both companies’ stock up, with Leap in particular seeing a surge beyond even the implied price that MetroPCS specified. Leap’s stock was trading at around $72 before the announcement.
Technology Business Research Inc. analyst John Byrne noted that both Leap and MetroPCS have seen their stock prices face a similar downward trajectory in recent weeks, which affected the price implied for Leap’s stock and is probably lower than what Leap wants. That might mean that the two companies negotiate further on the price-and the fact that investors pushed the stock price above the $77.89 mark reflects optimism about a higher price eventually being worked out. Byrne said at this point, the merger is almost inevitable.
All important synergy
MetroPCS estimated the value of the merger synergies at about $2.5 billion. The combined company would have about 6.2 million customers-not nearly as many as Alltel Corp. the current No. 5 carrier. However, the combined company would have significant spectrum holdings in major metropolitan markets around the country, which Alltel lacks.
MetroPCS’ CFO J. Braxton Carter noted that his company already operates in several top-10 markets and by 2009, plans to operate in nine of the top 12 U.S. markets. MetroPCS has focused on large, urban markets, and Leap has honed its approach in second- and third-tier markets, with little overlap between their holdings.
Both Leap and MetroPCS were major bidders in last year’s advanced wireless services spectrum auction: MetroPCS shelled out $1.4 billion for eight licenses covering 144.5 million people, including spectrum in the New York metropolitan area and Dallas-Fort Worth, as well as two regional licenses in the Northeast and West; Leap and its bidding partner won 100 licenses, including regional licenses in the central U.S. and the Great Lakes region and local licenses across many areas of the Southeastern U.S.
“In regards to a national unlimited offering, I think that is something that we’ve got to think about,” Linquist said during the call with investors. He also spoke of the potential for “expanded regional superclusters”-which sounds much like a super-sized version of Leap and MetroPCS’ current strategies-in areas such as California, Texas/Louisiana, the Northeast, and Georgia/Tennessee/the Carolinas.
700 MHz auction looming
However, the proposed merger could make the upcoming 700 MHz auction tricky for the two companies. Linquist estimated that a merger could close as quickly as spring 2008; the auction is scheduled for January. The FCC’s anti-collusion rules would keep the two separate companies from communicating with each other about bidding plans, unless they were to execute a joint bidding agreement.
