AT&T’s Leap Deal Puts Pressure on Smaller Rivals to Pair Up

July 15 (Bloomberg) -- Bloomberg's Cristina Alesci examines AT&T's $1.2 billion deal for Leap Wireless as the company secures spectrum and looks at what's next for the carrier. She speaks on Bloomberg Television's "Bloomberg Surveillance."

AT&T Inc. (T)’s $1.2 billion deal to buy Leap Wireless International Inc. (LEAP) adds pressure on smaller competitors such as Sprint Corp. (S) and Dish Network Corp. (DISH) to bulk up through mergers and acquisitions of their own.

AT&T, the second-biggest U.S. wireless carrier, announced plans on July 12 to buy Leap for $15 a share in cash, offering a premium of 88 percent over the target’s closing stock price. The transaction gives AT&T more pay-as-you-go customers, along with airwaves to improve its network. Leap’s stock more than doubled to $16.95 at the close in New York.

The move adds to the drumbeat for a merger between Sprint and T-Mobile US Inc. (TMUS), the third- and fourth-largest carriers, said Chetan Sharma, a wireless-industry analyst in Issaquah, Washington. Smaller regional companies such as U.S. Cellular Corp. or NTelos Holdings Corp. (NTLS) also may become takeover bait as everyone strives to keep up with the dominant service providers, AT&T and Verizon Wireless.

“Everyone below the top four is pretty much done” because of the looming consolidation, Sharma said. “I don’t think they’ll exist beyond the next 18 months.”

The AT&T-Leap transaction removes one of a dwindling number of targets in the industry’s merger frenzy. MetroPCS Communications Inc., a rival to Leap in the prepaid market, was scooped up in May by Deutsche Telekom AG, which combined the carrier with its T-Mobile division. The German phone company had considered a Leap deal before the MetroPCS merger was completed, people familiar with the matter said earlier this year.

SoftBank’s Move

SoftBank Corp. (9984), meanwhile, acquired a controlling stake in Sprint on July 10 and is giving the carrier a $5 billion cash infusion to help it expand its network and potentially make more deals. Sprint already completed an acquisition of wireless-network partner Clearwire Corp. last week.

U.S. Cellular could be next on the block, Sharma said. The Chicago-based carrier, which is majority-owned by Telephone & Data Systems Inc., serves about 5 million customers and has already shown a willingness to make deals.

Sprint bought U.S. Cellular’s business in some Midwestern markets for $480 million. U.S. Cellular also agreed to sell the majority of its Mississippi spectrum license to T-Mobile for $308 million. In June, the carrier’s chief executive officer left to run a cosmetics company, prompting Telephone & Data Systems to appoint its chief financial officer to the post. U.S. Cellular has a market value of about $3.2 billion.

Eyeing NTelos?

NTelos is another target, said Bill Menezes, an analyst at Stamford, Connecticut-based research firm Gartner Inc. (IT) The carrier, valued at more than $380 million, serves consumers and businesses in Virginia and West Virginia, as well as portions of Maryland, North Carolina, Pennsylvania, Ohio and Kentucky.

NTelos shares gained 6.1 percent to $17.81, the biggest one-day gain in more than seven months. U.S. Cellular jumped 8.3 percent to $38.77, its best performance since August 2011.

Kelly Harfoot, a spokeswoman for U.S. Cellular, and Jeffrey Goldberger, a spokesman for Waynesboro, Virginia-based NTelos, didn’t respond to requests for comment.

AT&T’s Leap acquisition follows a failed attempt to buy T-Mobile for $39 billion in 2011. AT&T, based in Dallas, walked away from that deal after facing opposition from regulators, who were concerned about losing one of the industry’s top four.

“When you look at the U.S. market, the regulatory environment is such that the top two can’t get a lot bigger,” Rajeev Chand, head of research at San Francisco-based Rutberg & Co. “So acquiring beyond the top four is a good idea.”

‘Plan B’

Since the 2011 T-Mobile deal fell through, Verizon and AT&T have solidified their strength as the two most formidable competitors. That may make a case for Sprint and T-Mobile to merge, Sharma said, even though it would reduce the top ranks to three. SoftBank CEO Masayoshi Son expressed interest in pursuing T-Mobile as a “Plan B” to acquiring Sprint.

Dish, the satellite-TV provider controlled by billionaire Charlie Ergen, has become the industry’s wild card. Ergen attempted to acquire both Sprint and Clearwire in an effort to enter the wireless-service market. After those bids were rebuffed, T-Mobile may become Ergen’s next target, according to Chris King, a Baltimore-based analyst at Stifel Financial Corp. Dish, based in Englewood, Colorado, approached Deutsche Telekom about a possible merger with T-Mobile before the MetroPCS transaction closed, people familiar with the matter have said.

Spectrum Search

Buying Leap will give AT&T about 5 million customers, more airwaves and a larger piece of the pay-as-you-go market. As part of the deal, Leap shareholders will get the right to proceeds from the sale of Leap’s 700-megahertz spectrum in Chicago, which was bought for $204 million last year.

AT&T CEO Randall Stephenson has been on a hunt for spectrum -- the airwaves that let mobile devices make calls and download data -- since the foiled T-Mobile bid. AT&T made a $1.9 billion deal in January to acquire airwaves from Verizon, helping it build capacity to handle increasing demand for Internet data and video streaming on mobile devices.

AT&T also is sizing up takeover candidates in Europe, such as U.K. mobile-phone venture EE, according to people familiar with the company’s plans. The idea would be to gain an edge in the region by rolling out faster, fourth-generation networks.

Leap’s stock surge today reflects the value of AT&T’s offer plus the Chicago spectrum proceeds. Investors may also expect a competing bid, said Kevin Smithen, an analyst with Macquarie Securities USA Inc.

“This is another example of the escalating value of spectrum as data pricing gets more competitive and data devices like tablets become more ubiquitous,” said Smithen, who has the equivalent of a sell rating on AT&T.

Even after this year’s wave of deals, there’s still room for more consolidation, said Gartner’s Menezes.

“There’re still a lot of smaller fragmented cellular operators out there,” he said.

To contact the reporters on this story: Olga Kharif in Portland at okharif@bloomberg.net; Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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