AT&T’s Spectrum Deal With Leap Muddles Value of Acquisition

AT&T Inc.’s agreement to sell some of Leap Wireless International Inc.’s airwaves as part of its acquisition of the wireless carrier has clouded the true value of the deal.

In addition to paying $15 a share in cash, AT&T will sell a block of Leap’s spectrum in Chicago and add the proceeds to the transaction price. The question now is how much money the spectrum will fetch, and what that means for Leap’s valuation.

Wireless airwaves -- the frequencies that let mobile devices connect to networks -- are a finite resource and increasingly prized by carriers. Investor speculation that Leap’s spectrum will generate about $2 a share, along with the long-shot prospect that a rival bid may emerge, helped the stock more than double to $17.28 by the close of trading today. Still, there’s little agreement on the quality of the Leap airwaves, which may suffer from interference with television frequencies.

“The challenge is finding somebody who wants to buy it,” said Tim Farrar, an analyst at Telecom, Media & Finance Associates Inc. in Menlo Park, California.

Leap acquired the license to the spectrum from Verizon Wireless last year for $204 million. That price works out to about $2.58 a share, valuing the AT&T transaction at $17.58. AT&T, the second-largest wireless carrier, is selling the airwaves because it doesn’t need them. It expects the Leap acquisition to be completed in six to nine months.

Differing Opinions

Walt Piecyk, an analyst at BTIG LLC, isn’t optimistic the airwaves will sell for $204 million this time around. He doesn’t expect a price of much more than $1.25 a share. S&P Capital IQ analyst James Moorman, meanwhile, estimates that the airwaves could get $4 a share after the interference question is settled.

“The Chicago license will sell for much more than the $204 million Leap paid for it once interference is cleared,” he said in a report.

Brad Burns, a spokesman for Dallas-based AT&T, declined to comment. Greg Lund, a Leap spokesman, didn’t immediately respond to a message seeking comment.

Buying Leap will give AT&T about 5 million customers and help it expand in the pay-as-you-go market, where subscribers don’t have long-term contracts. The cash portion of the bid, which totals about $1.2 billion, represents an 88 percent premium over Leap’s shares before the deal was announced. The stock had closed at $7.98 at the end of last week.

“Both the Chicago spectrum as well as the potential that there may be another bid contribute to the stock trading high,” said Todd Rethemeier, an analyst at Hudson Square Research in New York.

T-Mobile’s Move?

The most likely company to offer a counterbid for Leap is T-Mobile US Inc., said Jennifer Fritzsche, an analyst at Wells Fargo & Co. in Chicago. T-Mobile already merged with Leap rival MetroPCS Communications Inc. earlier this year.

“Owning Leap would improve the depth of its current portfolio,” she said in a report.

Anne Marshall, a T-Mobile spokeswoman, declined to comment.

Leap, based in San Diego, first agreed to buy the Chicago airwaves from Verizon in December 2011 as part of a swap of assets. The value of the spectrum is uncertain because it has potential interference with television channel 51. Verizon has been trying to sell similar airwaves without much success because of the interference concerns, Fritzsche said.

“We believe it is unlikely Leap will be able to sell this for much more than the original cost,” she said.

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