AT&T's $1.2B bid for Leap is mostly about spectrum

AT&T's (NYSE:T) plan to take over prepaid wireless operator Leap Wireless (NASDAQ:LEAP) is primarily about gaining much-needed spectrum for mobile broadband services.

AT&T announced last week that it will buy Leap, operator of the Cricket brand of no-contract wireless service, in a cash deal worth $1.2 billion, or $15 per share. Leap shareholders will also receive contingent rights to net proceeds from the sale of Leap's 700 MHz A block spectrum in Chicago, which Leap purchased for $204 million in August 2012.

AT&T intends to retain the Cricket brand and expand Cricket's presence to additional U.S. cities, much as T-Mobile (NYSE:TMUS) is doing with the recently acquired MetroPCS, which had been Leap's chief rival in the no-contract space. AT&T has some 107 million wireless customers, but only 7 million are prepaid, so Leap's 5 million prepaid users will boost AT&T's play in no-contract services.

Leap operates a legacy CDMA network and has deployed LTE to a coverage area of 21 million POPs. But average speeds on its LTE network are only around 4 Mbps due to the operator's spectrum constraints. AT&T will likely shutter Leap's existing CDMA and LTE networks, refarming the spectrum for use with its own HSPA and LTE services much as T-Mobile is doing with the CDMA and LTE networks it gained when it acquired MetroPCS.

Clearly the main attraction in this deal is Leap's spectrum holdings, which include 1.9 GHz PCS licenses and 1.7/2.1 GHz AWS licenses covering 137 million POPs. The spectrum is said to be largely complementary to AT&T's existing spectrum licenses.

AT&T said it intends to put Leap's unutilized spectrum--which covers 41 million people--to use in furthering its own LTE deployment "and providing additional capacity and enhanced network performance for customers' growing mobile Internet usage."

AT&T currently controls less spectrum in aggregate than either Verizon Wireless (NYSE:VZ) or Sprint (NYSE:S) and even holds less spectrum per subscriber than T-Mobile, according to Jonathan Chaplin, analyst with New Street Research. Chaplin, who was quoted by the Wall Street Journal, said AT&T "is much worse off than anyone on spectrum per subscriber."

AT&T's offer for Leap involved a huge price premium, some 88 percent above Leap's closing price of $7.98 per share prior to the deal's announcement. This was probably necessary to forestall competing bids from likely rivals such as T-Mobile US and Dish Network (NASDAQ: DISH).

"The only real question for Leap is whether AT&T is the best and final offer," said telecommunications analyst Craig Moffett, who was quoted by the New York Times.

The deal is subject to review by the FCC as well as the Department of Justice, which in 2011 scuttled AT&T's $39 billion bid to acquire T-Mobile. If the Leap transaction closes within the next six to nine months, as AT&T predicts, it is unclear what effect that may have on the planned auction of 600 MHz TV broadcast spectrum next year.

The DoJ has suggested ways for the FCC to restrict auction participation by market leaders AT&T and Verizon Wireless in order to ensure Sprint and T-Mobile have ample opportunities to bid. With auction rules up in the air, Leap appears to offer AT&T the best opportunity to access vast amounts of additional spectrum, even if it is not the attractive low-band spectrum that is particularly useful for transmitting broadband data inside buildings and over long distances.

"There's not much that AT&T can do anymore in the United States. The rest of the wireless business is probably off limits for regulatory reasons," said Moffett.

For more:
- see this AT&T release
- see this New York Times article
- see this Wall Street Journal article
- see this USA Today article

Related articles:
AT&T snaps up Leap Wireless for $1.2B
Report: T-Mobile or Dish increasingly likely to swallow Leap Wireless
Canada's new spectrum transfer rules could open door for Verizon
Report: AT&T hunts for deals in Europe with Telefónica, Vodafone and others
T-Mobile: We're 'ahead of schedule' on CDMA-to-LTE MetroPCS migration
Leap suggests its LTE roaming deal is with Sprint, hints at more device financing options
AT&T, Verizon may face restrictions in 600 MHz auction


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