Monday, July 15, 2013

The case for T-Mobile bidding on Leap Wireless

After the never-ending Leap Wireless and Metro PCS merger speculation saga, AT&T finally decided the other day to put Leap Wireless out of their misery by agreeing to purchase the company for $1.2Bn.

The deal makes sense for AT&T, no doubt about it. They get an interesting mix of PCS and AWS spectrum which they badly need after the T-Mobile merger debacle. To sweeten the deal, they also get about 5M Leap customers as well as ownership of the brand "Cricket". On top of this, the deal is a test to see what the federal regulators, FCC and Department of Justice will tolerate after the regulators killed the proposed T-Mobile merger.

All this for only $1.2Bn. Congratulations AT&T!

I will here make the case for why T-Mobile (or to a lesser degree, Sprint) should, or possibly must, get involved and start bidding on Leap Wireless before the deal with AT&T is closed.

1. Spectrum.

The T-Mobile spectrum position has improved significantly after the purchase of Metro PCS, but it is not great. While the biggest problem for T-Mobile is a complete lack of low-frequency spectrum (700/850Mhz or lower), the depth of their high-frequency spectrum (1700/1900Mhz or higher) position is not great and the Leap Wireless position would be highly complementary to their current holdings.

2. Customer growth.

If we look at the relative size of T-Mobile and their track record of organic growth compared to their three main competitors the outlook is not great. I think it is highly unlikely that T-Mobile, while on somewhat of a tear lately, would succeed in adding 5M customers through organic growth and a marketing spend of $1.2Bn. 

3. Brand value.

If T-Mobile is serious about being the un-carrier among the top four carriers, owning both Metro PCS and the Cricket brands would make it possible for them to segment the prepaid market nicely between their two brands.
4. Zero-Sum game.

I look at the current US wireless market as a zero-sum game in the sense that the market is relatively mature. By that I mean that it is unlikely (at least on the consumer side) that any significant total subscriber growth or major spectrum additions are going to happen any time soon.

If T-Mobile agrees with this analysis it makes total sense for them to bid on Leap Wireless for their own gain, but also as an added benefit, to AT&Ts loss. Here is a rare opportunity for T-Mobile to stick it to the big guys (AT&T and Verizon). Opportunities like this do not come often and should not be missed.

5. Valuation.

$1.2Bn dollars? Seriously? I understand that the ARPU of the Cricket customer base may not be sky high but there is no way that the spectrum position+5M customers+brand value+being able to hurt AT&T is not worth more than $1.2Bn to T-Mobile. 

Leap Wireless purchased their AWS position for $984M back in the day and while that doesn't guarantee that it is still worth the same amount today, I haven't heard many people talking about how spectrum has lost value over the years. If we assume that the spectrum is still worth $984M, that puts the current value of the 5M customers plus the brand equity of Cricket at about $200M. That sounds low to me. While 5M customers may not mean much to AT&T, for T-Mobile they would represent a significant boost, so would the Cricket brand if positioned correctly.

Yes, there are other interesting spectrum positions out there, like Dish, but very few of them come with 5M existing, paying wireless customers and a national brand.

I think that even if T-Mobile disagrees with my entire analysis, it still makes sense to bid on Leap Wireless to try and make it more expensive for AT&T to take over, just like Dish managed to do when getting involved in the Sprint, Clearwire and Softbank love triangle.

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