Leap Jumping at Sale Is Seen as Best Option: Real M&A

As Leap Wireless International Inc. pledges to consider all possible strategy changes, a sale would be the mobile carrier’s best shot at turning around the industry’s lowest valuation.

Net losses every year since 2006 and $3.2 billion in long-term debt pushed Leap’s shares down to 0.6 times earnings before interest, taxes, depreciation and amortization. That’s the cheapest among all U.S. telecommunications carriers trading at $100 million or more, according to data compiled by Bloomberg. The stock has fallen despite Leap’s ownership of wireless spectrum the $393 million company says should fetch $3 billion.

Leap sank 19 percent on Aug. 7 as subscriber defections overshadowed its plan to mull options including a sale, almost five years after rejecting a $5.5 billion bid from MetroPCS Communications Inc. Falcon Point Capital LLC says shareholders could see the value of their stakes doubling in a takeover from $4.96 a share yesterday, while Pivotal Research Group sees a deal driving the stock to $16. AT&T Inc., Verizon Wireless, Sprint Nextel Corp. and T-Mobile USA may all covet Leap’s spectrum, said Chetan Sharma, a wireless industry analyst.

“The best hope is for it to be sold,” Michael Mahoney, a senior managing director at Falcon Point in San Francisco, said in a telephone interview, referring to a sale of the entire company. “Their greatest value is in their spectrum. Because they have a lot of debt, the No. 1 way for shareholders to make money here is to do a deal.”

Eliminate Nothing

“While we won’t comment on speculation regarding a possible sale of the company, we are taking specific and significant actions to increase our margins, put the company on a clear path to free cash flow, realize the value of our assets and return to growth over time,” said Gregory Lund, a spokesman for Leap.

When asked on an Aug. 6 conference call with analysts whether Leap’s options include selling assets or the entire company, Chief Financial Officer Jerry Elliott said, “There is nothing that you can think of that you should eliminate right now from the list of possibilities,” according to a transcript. The CFO joined the company in May.

After retreating 20 percent to $4.42 in the two days after Leap reported quarterly results, the shares surged 12 percent yesterday for the biggest gain since November.

Today, Leap shares rose 9.9 percent to $5.45.

The company’s focus on offering low-cost wireless plans through its Cricket brand has faced increased competition from rivals such as Overland Park, Kansas-based Sprint. Leap, which fired Chief Operating Officer Raymond Roman last month, lost more than 289,000 customers during the second quarter, almost triple the amount a year earlier. That left the company with 5.9 million subscribers at the end of June.

95% Retreat

The stock has plunged 71 percent from last year’s peak and 95 percent since an all-time high in 2007. Leap’s long-term debt has risen from $588.3 million at the end of 2005 amid an expansion into new markets and the purchase of spectrum licenses.

While the company is counting on sales of Apple Inc.’s iPhone, which it began offering in June, to win market share from AT&T, Verizon and Sprint, Leap is selling the device without the same subsidies as its rivals. The challenge is finding customers undaunted by the phone’s price tag, said James Ratcliffe, an analyst at Barclays Plc in New York.

Leap’s assets would be valued at $5.25 a share if the company were liquidated, or 5.8 percent higher than yesterday’s close, according to Steve Sweeney, an analyst at Pivotal.

Takeover Value

The payoff would reach $16 a share if a buyer purchased Leap and kept its operations running, he said. Sweeney arrived at that by using Leap’s estimate that its spectrum should be valued at $3 billion and applying a 1.5 multiple to the company’s Ebitda. Including net debt, a purchase at that stock price implies a total deal value of almost $4 billion, according to data compiled by Bloomberg.

“Leap management has made it clear from their comments on the conference call that they would be willing to come to the table and examine all options including a sale,” New York-based Sweeney said in an interview. “Eventually, yes, I think Leap gets acquired.”

While NCM Capital Management Group Inc. says a deal will probably happen at some point, the firm gave up waiting and completed the sale of its entire stake this week, Deputy Chief Investment Officer Michael Custer said in an interview. NCM owned more than 600,000 shares at the end of June.

‘Selling Out’

“We are actually selling out,” said Custer, who helps oversee about $1 billion at NCM in Durham, North Carolina. “The stock where it is, it’s kind of dead. We were disappointed when a deal wasn’t announced. We were hoping that would have been the end game and think that eventually it will be.”

Christopher Larsen, an analyst at Piper Jaffray Cos. in New York, cut his share-price estimate for the company to $3.50 on Aug. 7, saying in a report that “there is a lot to be concerned about with Leap.” Still, he said takeover speculation may help limit losses in the shares.

MetroPCS, based in Richardson, Texas, offered to buy Leap in September 2007 in an all-stock bid valued at $75.05 a share when announced. Leap’s board rejected the proposal, and MetroPCS walked away two months later. Leap shares had peaked at $98.33 in July 2007.

Sharma, the independent wireless analyst, said potential acquirers could now include any of the four largest U.S. carriers: AT&T, Verizon, Sprint and T-Mobile. Leap’s Cricket service operates in cities including San Diego, Baltimore and Seattle, and the spectrum it owns covers frequencies similar to the ones used by the largest phone companies.

Bandwidth Demand

Roni Singleton, a spokeswoman for Sprint, declined to comment on speculation the company might acquire Leap. So did AT&T’s Mark Siegel, Verizon Wireless’s Brenda Raney and Ron Low, an outside spokesman for T-Mobile.

Carriers need more wireless airwaves to keep up with escalating customer demand for mobile-data services, such as video and social networking on mobile phones and tablets. Worldwide mobile-data traffic will soar 18-fold by 2016, according to Cisco Systems Inc. To keep up, carriers are beefing up their networks.

A deal for the entire company, not just spectrum, is more likely, said John Stone, a partner at telecom investment bank Near Earth LLC in Stamford, Connecticut.

“Why on earth would you buy spectrum, when you can buy a business that has spectrum, and you get customers, towers, infrastructure, store fronts?” he said in a telephone interview. “It’s much smarter.”

‘Very Complementary’

Stone said MetroPCS remains a good fit for Leap.

“Their spectrum is very complementary,” he said. “A buyer who bought Leap could be interested in both. They’d make a great combination.”

Drew Crowell, a spokesman for MetroPCS, declined to comment on takeover speculation.

America Movil SAB, the wireless carrier owned by Mexican billionaire Carlos Slim, may wish to expand its U.S. business and could accomplish that by purchasing Leap, Walter Piecyk, an analyst at BTIG, wrote in an Aug. 7 report. An America Movil representative declined to comment on takeover speculation.

Several outside factors affect the timing of a potential bid for Leap, according to Sharma. Verizon is working to close a $3.6 billion acquisition of spectrum from cable companies. Sprint is distracted with its network expansion, and may wait to do acquisitions next year, Pivotal’s Sweeney said.

“Depending on how the different chess pieces move, a Leap acquisition could happen sooner or later,” Sharma said. “It may be a 2013 event.”

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