The recent M&A spree in the US wireless world has taken a further twist, after AT&T has reached an agreement to acquire the entirety Leap Wireless, the 5th largest cellco in the US. The acquisition will give AT&T additional spectrum covering 137 million people in the PCS and AWS bands, an unused portion of which it plans to put into use as soon as it gets regulatory approval of the deal to expand its 4G deployment and capacity.
Since missing out on a merger with MetroPCS to T-Mobile, Leap Wireless has seemingly lacked an immediate direction, so news of its acquisition makes sense for its survival. Antitrust regulators, however, may take issue due to the falling number of competitors in the mobile market. But on balance we think this deal will get through. The MetroPCS/T-Mobile merger was approved on the basis that it made both operators viable against the big two, but the Department of Justice and FCC – which killed AT&T’s plans to acquire T-Mobile – could be less positive about one of the big two snapping up one of the last of the tier 2 US cellcos.
If an alternative bidder, such as Dish, does not emerge to usurp the deal, and AT&T gets its way, it will pay $15 a share in cash for Leap, an overall value of $1.2bn. In addition to all of Leap’s licenses, networks and retail stores, AT&T will also assume control of Leap’s 5 million subscribers ,but it is the AWS frequencies, which will push AT&T ahead in its ongoing battle for spectrum capacity, that are undoubtedly the big draw. AT&T already holds AWS licenses of its own and plans to start building out LTE in that band once it finishes its current 700MHz deployment.
Leap’s CDMA network covers about 96 million POPs in 35 states and its LTE services currently reach 21 million of those people. The AWS and PCS spectrum covers 137 million POPs, so in addition to existing LTE users, AT&T gets some additional unused 4G frequencies covering 41 million potential customers.
The other interesting aspect of the deal is whether AT&T will finally take the prepaid market seriously. Despite some recent halfhearted moves, the leading two operators have largely steered clear of the reduced margins of the pay-as-you-go sector, leaving it to an increasingly bitter price war between T-Mobile/MetroPCS, Leap and Sprint’s various prepaid brands, such as Boost and Virgin. However, while spectrum will be more valuable than a low end user base to AT&T, it may be eyeing the increasing tendency of relatively high value subscribers to opt for prepaid deals, especially for second devices such as tablets or for family members.
“It’s mostly about spectrum,” Craig Moffett of Moffett Research told CNet. “They keep Leap’s spectrum out of T-Mobile’s hands. Most people thought T-Mobile would be the eventual buyer.”
However, accommodating 5.2 million prepaid, mainly low value (in AT&T terms) customers will create challenges, especially as the business is not growing – Leap lost a net 93,037 customers in the first quarter and posted a net loss of $109.6 million. And of course, its 3G CDMA network is incompatible with AT&T’s HSPA(+) system. The acquirer will have to find ways to migrate those users to LTE as quickly as possible, or further subscriber losses in low-ARPU 3G may actually be welcome.
AT&T’s own prepaid efforts have been lackluster. It does offer the Go pay-as-you-go service and recently started testing a new offering called Aio Wireless, but in the first quarter this year, it reported a net loss of 184,000 prepaid customers.