Analysts: AT&T overpaying for Leap

Now that financial analysts have had some time to digest AT&T Mobility's (NYSE:T) proposed acquisition of Leap Wireless (NASDAQ:LEAP), many believe AT&T may be overpaying for the no-contract carrier and its spectrum.

AT&T said that it will pay $1.2 billion, or $15 per share, to acquire Cricket carrier Leap, but analysts said that headline price hides other costs AT&T will assume, which will raise the total price of the transaction. Further, AT&T has said Leap shareholders will gain the net proceeds received on the sale of Leap's 700 MHz A Block spectrum in Chicago, which Leap purchased for $204 million in August 2012. However, the sale of that spectrum is likely to be complicated, which is clouding the true value of the deal.

"We believe AT&T is overpaying for Leap's spectrum," analysts at BMO Capital Markets wrote in a research note, according to Barron's. "We are surprised at AT&T's willingness to pay so much above market rates for spectrum. AT&T cited Leap as a way to jumpstart its entry into the prepaid segment although Leap too is struggling to compete against more compelling prepaid smartphone offers. The enterprise value including lease obligations is $5.25 billion, which we estimate is $2.31 per MHz POP," which is above other recent wireless deals. 

R. W. Baird analyst Will Power wrote in a research note that AT&T's offer is pricey, which could limit counteroffers. "The total transaction value of $3.8 billion values Leap's spectrum at roughly $1.30/MHz/POP on our calculation, which compares with $0.70 Verizon (NYSE:VZ) paid for SpectrumCo's spectrum and other recent deals," he wrote. "However, if one were to place a value on Leap's subscribers, network, and stores, that would imply a lower spectrum valuation […] Spending almost $4 billion to acquire spectrum in a few large markets and many mid-sized markets seems expensive, though it's still small relative to [AT&T's] balance sheet and free cash flow."

Their assessments follow one from BTIG analyst Walter Piecyk, who wrote that he believes AT&T will also be assuming debt, tower lease obligations and contractual obligations to Sprint and Apple that push the true deal price to more than $5.5 billion. "That is a grossly excessive price to pay for spectrum that is not very complementary to what AT&T already owns and is loaded with Leap's low-end customer base which use a technology that is incompatible with AT&T," Piecyk noted.

Also at issue is the sale of Leap's 700 MHz A Block spectrum in Chicago, which could be a problem because of interference concerns between the airwaves and TV broadcast spectrum. If AT&T can't sell the spectrum for the $204 million Leap paid to acquire the airwaves, that could limit how much Leap shareholders get as part of the deal. "The challenge is finding somebody who wants to buy it," TMF Associates analyst Tim Farrar told Bloomberg.

Nonetheless, many analysts think the deal will be approved by regulators. "This deal is probably achievable, but it will get looked at closely," Allen Grunes, an antitrust lawyer with GeyerGorey LLP in Washington, told Bloomberg.

"We don't believe regulatory approval will be an issue as AT&T likely gets some leeway from the failed T-Mobile deal, and we don't see any issues from our spectrum screen analysis," BMO analysts wrote.

But some public-interest groups are already moving against the transaction. "AT&T already has more wireless capacity than it needs to serve its customers, and it should focus on using what it has rather than continuing to try to buy out competitors," Harold Feld, senior vice president of Public Knowledge, said in a statement. "The wireless marketplace does not need more mergers and more concentration. Rather, all carriers should compete to win customers through improving their network quality, price plans, customer service, and handset selection."

- see this Bloomberg article
- see this Barron's article
- see this MarketWatch article
- see this GigaOM article
- see this BTIG blog post (reg. req.)
- see this separate Bloomberg article
- see this TIME article

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