Get ready for the drama - MetroPCS and Leap merger talks

Get ready for the drama
Get the popcorn ready as the drama between Metro PCS and Leap Wireless unfolds. Late yesterday, Leap Wireless announced it is rejecting [1] Metro PCS's unsolicited merger offer [2] that includes giving Leap 2.75 shares of MetroPCS stock for every Leap share they own. Metro PCS in turn reiterated the fairness of the deal and said it would evaluate its options [3].

There's never been any love lost between the two companies, whose histories date back about 10 years. MetroPCS executives have always told me through the years that Leap stole the original idea of unlimited local pricing service from MetroPCS. MetroPCS just couldn't come to market first because it filed for bankruptcy after spending too much at the C-block PCS auction in the mid-1990s.

Last year, Leap Wireless filed suit against MetroPCS [4] in a Texas federal court, claiming MetroPCS violated patents pertaining to its method of offering all-you-can-eat pricing plans. MetroPCS counter sued, saying Leap stole the pricing idea from the company when Leap's former parent, Qualcomm, was in talks for a network infrastructure deal in the mid-1990s. MetroPCS also accused Leap of having ulterior motives when Leap initiated merger talks with MetroPCS in late 2005 and early 2006. Moreover, President and CEO Doug Hutcheson has been with his company since its inception as has MetroPCS Chairman and CEO Roger Linquist.  

In its rejection of MetroPCS's offer last night, Hutcheson said in a letter [1] to Linquist that the proposal fails to take into account Leap's growth prospects, undervalues Leap's business, offers no premium to its shareholders and perhaps most importantly doesn't detail how senior management would be integrated. (That issue can cause a merger to collapse.)

Leap was clearly frustrated by the offer, saying it has repeatedly tried to engage in discussions with MetroPCS in the past regarding merger possibilities and other strategic collaborations but was rebuffed.

"We can only conclude that you recognize Leap's compelling long-term growth prospects and that your aggressive approach is intended to try to opportunistically capture a disproportionate share of this value for your shareholders prior to an increase in our relative valuation," Hutcheson said. "We will not be pressured into agreeing to an inadequate takeover proposal in order to satisfy an external deadline that does not meet the needs of our shareholders."

Linquist said in a press release [3] that contacts MetroPCS has had with a number of Leap's shareholders indicate they want to see a combo of the two companies "without unnecessary delay. It appears that Leap's board is ignoring the will of its shareholder base," he said.

There is no doubt that a combination of the two operators makes the most sense. The combo would get significant scale and cost savings. Their union is especially critical given the fact that bigger operators are working to stave off the competitive threats of flat-rate pricing by launching similar plans of their own while smaller operators are copying to get a piece of the pie. So far MetroPCS and Leap have managed to keep a step ahead with competitive offerings, but both operators are headed for bigger metropolitan markets, and that's where nationwide operators are apt to fight more ferociously for their valued market shares. Don't forget that the sub-prime customers these two companies target are more risky customers.

We will see a deal. When? That's a good question, but I'll be sure to sit back and enjoy the drama in the meantime. -Lynnette [5]