With the large wireless carriers bidding top dollar on wireless licenses in the Federal Communications Commissions re-auction of personal communications services licenses, smaller companies looking to build out their wireless business plans are left to carefully bid their way into smaller markets that may get overlooked.
One such operator, San Diego-based Leap Wireless International Inc., said it is taking its role as a small player in the wireless auctions seriously. Through 29 rounds of bidding, Leap had the top bid on 20 licenses totaling more than $385 million. Those licenses involved mostly smaller markets where the company’s flat-rate, all-you-can-talk local wireless service makes sense.
“Our goal in the auction is to buy licenses that are well placed to take advantage of our Cricket service,” said Dan Pegg, senior vice president of public affairs for Leap, referring to the company’s wireless offering. “That profile includes a somewhat geographically confined community where the people live, work and play in one area. Bidding on a license for the Los Angeles market does not make any sense for us since they have numerous counties and cities that spill over into each other covering a vast area.”
Leap’s Cricket service includes a flat rate of $30 per month for unlimited local calls with no roaming available. Leap offers service in Tucson, Ariz.; Little Rock, Ark.; Charlotte and Greensboro, N.C.; Tulsa, Okla.; Chattanooga, Knoxville, Memphis and Nashville, Tenn.; and Salt Lake City. The company plans to roll out 25 additional markets by the end of this year.
Pegg said Leap is comfortable with its business plan as a local wireless carrier, touting its 7-percent average penetration rate within the first 12-months of introduction in a community.
“If a customer wants to travel a lot or needs roaming capabilities, we are not the wireless carrier for them,” Pegg explained.
The local approach also plays into Leap’s auction plans since it allows the company to bid selectively on markets that are financially attractive instead of having to bid on lots of markets to fill in a national footprint.
But even with its selective bidding, and its designated-entity status, Leap is going head to head against some of the larger wireless operators that have formed alliances with smaller DE’s to bid on all the licenses available. Those arrangements, which angered many of the DE’s looking to get into the wireless market, has forced Leap to dig a little deeper into its pockets.
“We have to bid aggressively on the licenses because if the larger carriers get a license, that license won’t go back on the auction block,” Pegg said.
Realizing that the large carriers were planning to bid on DE-specific licenses, Leap lined up a commitment for $250 million in equity financing to supplement funds for acquisitions and spectrum purchases just after the auction started.
Harvey White, chairman and chief executive officer of Leap, noted the line of credit provided the company with the flexibility to raise additional equity on an as-needed basis on favorable terms.
Leap said any licenses won through the auction would be added to its inventory of licenses currently covering 48.3 million potential customers in 32 states.
Investors looking to pick up telecom stocks at relatively bargain prices have paid attention to Leap. ING Barings recently released a report detailing Leap’s undervaluation on the open market.
ING Barings said Leap’s enterprise value ($868 million) is less than the value of its licenses, ($1.4 billion). The report also pointed out that Leap’s licenses alone would be valued at $2 billion if the company’s regions were worth the average of the auctions properties.
“With execution, we believe there is significant upside to Leap’s share price,” the report said. “So it appears that with about 10 days of bidding still to go, Leap’s enterprise is being valued at a significant discount to its asset value.”
Leap’s stock is trading around $25 per share, near its 52-week low, and well below its 52-week high of $110.50 per share.
