Leap Left in Lurch as MetroPCS Picks T-Mobile Merger

Leap Wireless International Inc. (LEAP) is now left to fend for itself as the combination of MetroPCS Communications Inc. and T-Mobile USA damps takeover prospects for the unprofitable wireless carrier.

Leap, which Chief Financial Officer Jerry Elliott said in August was considering options including a sale, has lost money every year since 2006 and analysts estimate it will keep posting deficits until 2016, according to data compiled by Bloomberg. Investors are giving little value to its operations, pushing Leap’s price-sales ratio to 0.15, the lowest among similar-sized U.S. wireless carriers, the data show.

Deutsche Telekom AG (DTE)’s deal to merge T-Mobile USA with MetroPCS to create a bigger No. 4 player in the U.S. wireless market drove Leap down 18 percent yesterday. Sanford C. Bernstein & Co. said Leap is left without a buyer right now because the most logical acquirer was MetroPCS (PCS), which also targets prepaid customers using the same network technology. A deal is unlikely soon because T-Mobile will need time to integrate the new assets and Leap’s $3.2 billion in long-term debt may deter Sprint Nextel Corp. (S), JPMorgan Chase & Co. said.

“The challenge for Leap is that their business just isn’t all that attractive on a standalone basis,” Craig Moffett, an analyst at Bernstein in New York, said in a telephone interview. “Right now they’re struggling to grow and they still aren’t profitable. That asset has always made more sense in the context of a larger business.”

Greg Lund, a spokesman for San Diego-based Leap, declined to comment on the company’s takeover prospects.

Eliminate Nothing

Before retreating yesterday, shares of the $494 million company had rallied 38 percent since Aug. 6. That day, Elliott was asked on a conference call with analysts whether Leap’s strategic options include selling assets or the entire company.

“There is nothing that you can think of that you should eliminate right now from the list of possibilities,” he said, according to a transcript. Michael Mahoney, a senior managing director at Falcon Point Capital LLC in San Francisco, said later that week that Leap’s best hope was to be sold.

Deutsche Telekom of Bonn said yesterday that it reached an agreement on the combination of its T-Mobile USA unit, the fourth-largest U.S. carrier, with Richardson, Texas-based MetroPCS. The biggest American wireless providers are Verizon Wireless, AT&T Inc. (T) and Sprint.

The announcement followed an Oct. 2 Bloomberg article that the companies were in talks. Germany’s largest phone company will own 74 percent of the new business, and MetroPCS shareholders will get $1.5 billion in cash.

Suitor Removed

“It seems that the only real suitor for Leap was PCS, and obviously if they do this deal with Deutsche Telekom, they’re out of the market for awhile,” Scott Schermerhorn, chief investment officer of Concord, New Hampshire-based Granite Investment Advisors Inc., which oversees about $560 million including Sprint shares, said in a phone interview. “I can’t imagine they’ll do that any time soon.”

The combination has already been approved by Deutsche Telekom’s supervisory board and MetroPCS’s board of directors. The transaction is projected to close in the first half of 2013 and is still subject to approval by MetroPCS shareholders and regulators.

Today, Leap shares dropped 2.1 percent to $6.10 at 11:22 a.m. New York time.

JPMorgan’s Philip Cusick cut his Leap rating to neutral from overweight yesterday, saying an acquisition of the company in the near future seems unlikely. The analyst said in a research note that while T-Mobile might eventually want to purchase Leap, the merger with MetroPCS delays that and regulators might still block a transaction.

No Necessity

“It’s not necessary for any other player to pick them up,” Chetan Sharma, an independent wireless analyst in Issaquah, Washington, said in a phone interview. “The chances are low. There’s not a significant strategic necessity for AT&T, Sprint or Verizon to acquire them.”

Leap’s stock has plunged 64 percent from last year’s peak and 94 percent since an all-time high in 2007. Its long-term debt has risen to $3.2 billion from $588.3 million at the end of 2005 amid an expansion into new markets and the purchase of spectrum licenses.

After reporting net losses for the last six years, analysts are forecasting Leap will remain unprofitable through 2015, according to data and estimates compiled by Bloomberg. It may post a profit of about $43 million in 2016, according to the average estimate.

Sales Multiple

Leap now trades at an 85 percent discount to its revenue from the last 12 months, the lowest valuation among U.S. wireless carriers that have a market capitalization larger than $100 million, data compiled by Bloomberg show. The group’s median multiple is about 1, the data show.

Leap, which fired Chief Operating Officer Raymond Roman in July, lost more than 289,000 customers during the second quarter, almost triple the amount a year earlier. That left Leap with 5.9 million subscribers at the end of June. T-Mobile had about 33 million customers, or roughly a third as many as Verizon Wireless and AT&T, and is adding 9.3 million more by purchasing MetroPCS. Sprint has 56 million.

Verizon Wireless, Sprint, MetroPCS and Leap all use the same network technology, called CDMA. AT&T and T-Mobile are on the GSM standard. The entire industry is moving toward a technology known as LTE.

‘More Difficult’

“If one assumes, as I do, that T-Mobile will continue to try and serve the MetroPCS customer profile, then Leap’s weakened because they are facing a more powerful and robust competitor that has more advertising dollars and more scale,” Charles Golvin, an analyst at Cambridge, Massachusetts-based Forrester Research Inc. (FORR), said in a phone interview. “It’s going to be more difficult for Leap to compete with these very large behemoths.”

Golvin said that while Leap may still be acquired, all potential buyers face impediments.

“Sprint is the most likely acquirer, but they are not in a good financial position,” he said. Sprint has $21.3 billion in total debt, more than its entire $15.6 billion market value. Also, T-Mobile will need time to integrate MetroPCS first, the analyst said.

Scott Sloat, a spokesman for Overland Park, Kansas-based Sprint, declined to comment on the company’s acquisition plans.

Bernstein’s Moffett said MetroPCS’s acquisition removes the most logical near-term buyer of Leap, explaining why its shares tumbled yesterday by the most in two months.

“Investors assumed that Leap Wireless was destined for its own acquisition,” he said. Shareholders reversed that stance yesterday “when they concluded it was going to be hard for anyone but a T-Mobile to own it,” he said.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Olga Kharif in Portland at okharif@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Tom Giles at tgiles5@bloomberg.net; Nick Turner at nturner7@bloomberg.net

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