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Thursday, March 4, 2010

How will the MetroPCS, Leap Wireless sale/merger play out?

Various news agencies have reported recently that both MetroPCS and Leap Wireless (Cricket) have hired investment banks for strategic advice — MetroPCS hired JP Morgan Chase, while Leap Wireless has hired Goldman Sachs.

Here is how this scenario can play out:
  • Leap & MetroPCS Merge: Most analysts consider this the most likely scenario. Leap and MetroPCS have tried to merge in the 2007, but talks stalled after they failed to agree on a price. Since then, both stocks have dropped more than 70 percent as the carriers face increasing competition from larger nationwide carriers with contract-free service, such as Sprint Nextel. In addition, both Leap and MetroPCS are CDMA carriers, and have expanded their networks to not encroach on each other’s markets. Therefore, their merger makes perfect sense, given that a combined company will have a seamless network, and it will create a sizable nationwide competitor to the Big 4 (Verizon, AT&T, Sprint-Nextel, T-Mobile)
  •  One of the Big 4 buys Leap or MetroPCS: I wouldn’t put such a move past the Big 4. As I stated earlier, a Leap/MetroPCS merger would create a sizable competitor with a (nearly) national footprint. So one of the Big 4 could pursue a deal purely for strategic reasons. But there are many restrainers to this move too.
    • Verizon is currently focused on building out its 4G LTE network, and might not see value in buying Leap or MetroPCS’ 3G networks, especially since Verizon has a pretty robust national 3G footprint. Also, Verizon supports players like StraightTalk/Tracfone the “value” segment, so it might not want to over-index in this segment.
    • I believe AT&T will be the least inclined to pursue this deal. Sprint’s purchase of Nextel has shown wireless carriers the complexities involved in maintaining multiple networks. So if AT&T bought either Leap or MetroPCS, they will have to maintain their current GSM network while also spending on maintaining Leap or MetroPCS’ CDMA network.
    • Sprint Nextel could possibly pursue either Leap or MetroPCS, but even this might be unlikely. Sprint’s purchase of Virgin Mobile and its continuing operations with Boost Mobile shows us that Sprint is doubling down on the prepaid space. But Sprint’s coffers are depleted on account of its recent purchases – Virgin Mobile and iPCS. So while Sprint and Leap/MetroPCS’ CDMA networks are compatible, it is not clear whether Sprint has the appetite for another acquisition.
    • While T-Mobile has the same technology conundrum as AT&T, Reuter reports that T-Mobile might be interested in purchasing either Leap or MetroPCS.
  • The deal fizzles out: Like in 2007, the deal heat might just fizzle out due to the carriers not being able to agree on valuations.

As we wait for this situation to play out, I suggest that we also not lose sight of US Cellular. Based in Chicago, U.S. Cellular is a regional CDMA carrier serving 26 states in the Midwest, the Southeast, and the Northwest. Service is nationwide, but native coverage is only in the carrier's home area in Illinois – and in other places, US Cellular’s customers roam on Verizon's network. So while US Cellular does not have the might to buy out either Leap or MetroPCS, its days as a stand-alone wireless carrier might be numbered.