Leap Wireless International Inc. sent a stinging rebuke to MetroPCS Communications Inc. in response to its merger proposal, but most analysts believe the public sparring is simply a precursor to an almost inevitable merger.
Both companies, which compete in the flat-rate, unlimited space and have few overlapping markets, have acknowledged the potential benefits of combining their operations and the fact that they’ve been communicating for some time about the possibility. In a conference call with investors last week, Leap CEO Doug Hutcheson said that a merger “could have merit, but not on these terms.”
Independent telecom analyst Jeff Kagan called the companies’ tiff “just part of the dance of pricing,” and Baird analyst William Power said he expected that MetroPCS’ “offer could go modestly higher given the combined medium- and long-term opportunities.”
MetroPCS is the larger company in terms of market capitalization, at more than $9 billion; Leap’s market cap is nearly $5.4 billion.
Public, pointed digs
For now, both companies are taking aggressive public stances because of disagreements about Leap’s value. Neither has been reticent about taking jabs at one another’s operations, leadership and potential.
In his official response letter to MetroPCS Chairman and CEO Roger Linquist’s merger proposal, Hutcheson categorized MetroPCS’ offer as “completely inadequate in a number of critical areas.”
The fiery letter went on to enumerate the failings of Metro PCS’ offer and its business as compared with Leap. “While we recognize the progress that MetroPCS previously made in launching . markets, we have concerns about your ability to successfully grow your business in line with shareholder expectations,” Hutcheson wrote, citing what he said were delays in MetroPCS’ launch in Los Angeles. MetroPCS denied any delays in that launch.
Hutcheson also said Metro has “only recently begun to contemplate meaningful broadband activities”-an especially pointed comment as Leap made a separate announcement detailing the launch of its Cricket Wireless Internet Service, a new unlimited, flat-rate broadband data service available in three markets.
While MetroPCS had claimed in its offer letter that, since its own initial public offering, Leap’s stock had been trading up on the basis of speculation that the two companies might merge, Leap responded that the offer undervalued its stock and “given the short trading history of your stock, we are concerned about how your future performance will evolve relative to the external expectations to which you are now subject.”
While Metro’s Linquist had said the offer should come as no surprise, given that the companies had talked about the possibility of a merger for several years, Hutcheson responded that Leap’s “team has repeatedly tried to engage in discussions with you in the past regarding merger possibilities as well as other possible strategic collaborations. . All of our varied and numerous efforts were to no avail. . Given our broad and repeated efforts, we were surprised by your sudden offer and the fact that you decided to make the offer publicly before even attempting to enter into substantive discussions with us.”
Wall Street responded to Leap’s rejection by sending both stocks down slightly on Monday-Raymond James even issued a downgrade-but both had rebounded by the end of the week.
Despite the acrimony, observers have concluded that the biggest question isn’t whether the merger will happen, but when. Specifically, the question is whether it might take place before the quiet period begins-expected in November-for the 700 MHz auction.
In a research note, Lehman Brothers analyst Brett Feldman concluded that “this is not a final rejection, but the next volley in what we expect to be continued negotiations. In our view, a deal between these companies is still likely. More specifically, we believe that a deal will be reached prior to Thanksgiving.”
However, Raymond James analyst Ric Prentiss said that the tone of the letter was surprising and “it may be difficult for both sides to reach a merger accord before the Auction 73 quiet period begins.
“We hope Leap will be reasonable in how much it expects to receive in a merger, as we believe shareholders of both Leap and [MetroPCS] would benefit from a combination,” Prentiss added.
Hutcheson said Leap will not take an “inadequate takeover proposal in order to satisfy an external deadline that does not meet the needs of our shareholders.”
