Not to put too fine a point on it, but Leap Wireless International Inc. has been growing by leaps and bounds-raising the question of whether the company’s rapid market rollouts will bring a repeat of the implosion that the carrier faced when it pushed itself into 40 markets and then declared bankruptcy only a few short years ago.
However, while Leap’s rapid network launches may seem familiar, there are some fundamental differences in the situation this time around, analysts say.
The company, which emerged from bankruptcy protection in August 2004, has been going gangbusters, launching service in a series of new markets and lining up joint ventures that will allow it to expand into even more. Leap now offers service in 49 markets in 21 states; just last week, it added Kentucky to the roster by rolling out service in Lexington and Louisville.
Bear Stearns telecom analyst Phil Cusick estimated in a 2005 research note that this year would be the “most intense portion of [Leap’s] new market build.”
Leap launched service in four markets in June alone: Cincinnati; and Houston, Bryan and College Station, Texas. According to the carrier’s Web site, it plans to add Austin and Temple/Killeen, Texas, by Aug. 1. The company also announced last week that it had put the finishing touches on a joint venture that will allow the carrier to offer service in Portland, Eugene and Salem, Ore. At the same time, the carrier sold its Toledo and Sandusky, Ohio, markets to Cleveland Unlimited Inc., which operates under the Revol brand in parts of Ohio and Indiana.
Unlike the last time around, Leap is pushing into top-tier markets rather than focusing exclusively on smaller, peripheral markets, noted Kevin Roe, president of Roe Equity Research. And T-Mobile USA Inc.-which also focuses on value-conscious wireless customers-has certainly taken note. When Leap rolled out Cricket service in Houston last month, T-Mobile USA responded aggressively; the company has been putting more effort into promoting a low-cost regional plan, as well as allegedly pressuring independent, multi-carrier dealers not to carry Cricket phones and service.
“If [Leap was] maintaining the status quo and really didn’t grow into some new markets, it would be hard for them to compete in the long run,” said Weston Henderek, senior analyst for Current Analysis. Henderek noted that Leap’s strategy of launching clusters of several markets together could help overcome some of the limitations on its coverage.
Leap is also gearing up for the Federal Communications Commissions’ advanced wireless services spectrum auction later this summer. The company declined to offer comment for this story due to being in a quiet period prior to the auction.
“We expect the company will be an active participant in the auction, focusing on licenses in both new and existing clusters,” wrote Raymond James analyst Ric Prentiss in a recent research note. Bear Stearns’ Cusick has estimated that the carrier potentially “could buy spectrum across much of Leap’s existing footprint and possibly double its current size.”
Leap recently closed on $1.1 billion in loans that it said would go toward financing spectrum purchases in the upcoming AWS auction. According to Leap’s filings with the Securities and Exchange Commission, the loans consisted of a “seven-year $900 million term loan, which was fully drawn at closing, and an undrawn five-year $200 million revolving credit facility.” The company also noted that it would use the cash for working capital, acquisitions or acquisition-related buildouts, and investments. In May, the carrier had proposed a plan for a forward sale of $250 million of its common stock through an underwritten offering and planned to use a portion of that money to buy spectrum.
“The first time around, they used debt to a significant extent to finance their spectrum purchases and their buildout,” Roe said. “They had a high-risk capital structure that ultimately led to their bankruptcy.” He added that capital markets at the time contributed to the company’s downfall, but that operationally, Leap was able to hold onto its markets, spectrum and customers through the bankruptcy and emerged as a company with a much healthier balance sheet.
“They came out with a fantastic balance sheet, so they have the financial leverage to go out there and acquire more spectrum and build out more markets,” said Roe. “The risk of them biting off more than they can chew and ending up in bankruptcy is highly unlikely.”
Roe also noted that CDMA network equipment and handsets are less expensive now, to Leap’s advantage.
The fact that Leap has its revenue-generating markets makes its situation now much different than before, according to Todd Rethemeier, telecom analyst for Soleil Securities/SurTerre Research, He has followed Leap since the company was spun out of Qualcomm Inc. and has Leap’s stock rated at a buy, but said that he’s keeping a close eye on the company.
Compared to Leap’s situation prior to bankruptcy, “The balance sheet is much different. They had so much debt,” Rethemeier said. Now, he noted, Leap has its legacy markets to rely on that are generating cash, and the company also has made changes to the service itself: it’s raised prices and now offers some data capabilities. Customers also can opt to pay for the ability to roam-though it is pricey, at 60 cents to 70 cents per minute.
“I think that they learned their lesson in the bankruptcy,” Rethemeier said. “I don’t think they’re going to repeat those same mistakes.”
