US incumbent AT&T has agreed to acquire prepaid operator Leap Wireless for US$15.00 per share in cash equating to US$1.19bn, and will also take on the target’s US$2.8bn net debt. AT&T’s offer represents an 88% premium on Nasdaq-listed Leap’s…
US incumbent AT&T has agreed to acquire prepaid operator Leap Wireless for US$15.00 per share in cash equating to US$1.19bn, and will also take on the target’s US$2.8bn net debt.
AT&T’s offer represents an 88% premium on Nasdaq-listed Leap’s US$7.98 closing price on Friday. However, Leap’s shares have subsequently risen 117% in pre-market trading to US$17.26.
Close to 30% of Leap’s shareholders have already committed to vote in favour of the transaction. Investors will also be given the net proceeds from the future sale of Leap’s 700 MHz “A block” spectrum in Chicago, which Leap purchased for US$204 million in August 2012.
Nomura analyst Mike McCormack estimated that the transaction values Leap at an enterprise value/EBITDA multiple of 6.6, and 5.2x EBITDA if the value of Leap’s spectrum licenses which aren’t in use are included. In a memo McCormack described the figures as “rich but fair”, based on the decline of Leap’s revenues and subscribers versus the scarcity of spectrum, synergies, and growth potential.
Wells Fargo analyst Jennifer Fritzsche noted that Leap shares were now trading above the offer price and speculated whether another bidder would come in. She dismissed Verizon Communications, because it is busy with Canada and buying Vodafone out of Verizon Wireless, and Sprint Corp, because its spectrum is not complimentary to Leap’s licences.
She pointed at the US’ number four player, T-Mobile US, as the most likely challenger: “In our view, Leap’s assets fit like a missing puzzle piece to T-Mobile US’ spectrum portfolio and owning Leap would improve the depth of its current portfolio.”
The prepaid provider, which operates as Cricket, has significant spectrum holdings and 5 million customers that AT&T will acquire. Leap’s network covers close to a third of the US population and it operates a 3G CDMA network. It also offers 4G in some areas, covering 21 million people.
AT&T said it plans to put Leap’s unused spectrum to use and that the target’s total portfolio covers 137 million people.
The frequencies are largely complimentary to the incumbent’s and AT&T plans to keep the Cricket brand and roll-out prepaid services to more cities.
In a statement AT&T said the combined company will resources, scale and spectrum “to better compete with other major national providers for customers interested in low-cost prepaid service”.
The move puts it in direct competition with T-Mobile US, which it tried to buy for US$39bn but had to pull the plug on in late 2011 due to regulatory pressure. The German-owned operator completed its acquisition of prepaid operator MetroPCS earlier this year and has looked to customers at the lower end of the market.
The deal is subject to approval from Leap shareholders, the Department of Justice and the Federal Communications Commission. AT&T has said it expects to close in six to nine months time. The parties have brokered break-up fees between US$46m and US$71m, which could be paid out depending on different circumstances.
Leap recorded revenues of US$3.1bn last year and adjusted OIBDA of US$601m. Meanwhile AT&T registered US$32.6bn revenues for 2012.
Lazard served as sole financial adviser to Leap and Wachtell, Lipton, Rosen & Katz served as legal counsel.
Evercore Partners was financial adviser to AT&T while Sullivan & Cromwell served as counsel.
