AT&T (NYSE:T) previously passed on an opportunity to strike a deal with no-contract wireless carrier Leap Wireless (NASDAQ:LEAP) but was ultimately the only bidder for the company and wound up paying 58 percent more than it had initially offered, according to a securities filing.
According to Leap's preliminary proxy filing on the deal with the Securities and Exchange Commission, the Cricket provider sought deals or merger agreements with a range of wireless partners during the past several years, likely including MetroPCS, Dish Network (NASDAQ: DISH), T-Mobile US (NYSE:TMUS) and parent Deutsche Telekom, and Sprint (NYSE:S) and new parent SoftBank.
In the end, AT&T was the only company willing to make a definitive bid for Leap, after initially walking away from a possible arrangement that had been under discussion: In March 2012, AT&T CEO Randall Stephenson called Leap CEO Doug Hutcheson and indicated that AT&T did not have any interest in a joint venture or MVNO arrangement with Leap, and in April 2012 Stephenson told Hutcheson AT&T wasn't interested in an acquisition either.
The proxy filing, prepared for Leap's shareholders, goes to great lengths to detail the dire straits that Leap's business found itself in as it wound its way toward being acquired by AT&T. According to the filing, Leap said its subscriber base declined 22 percent between March 31, 2012, and June 30, 2013, "resulting in Leap's fixed costs (including its significant purchase commitments) being spread over a smaller customer base." Leap said its debt and costs continued to increase, making it difficult for the company to fund its business.
Further, Leap said that "T-Mobile's planned shutdown of the legacy MetroPCS CDMA network and the scaling back of the manufacture of AWS-compatible CDMA handsets are likely to adversely impact Leap's ability to procure cost-effective AWS-compatible CDMA devices in the future." Leap said it has tried to remain competitive by offering better smartphones new services such as Muve Music, but that despite these efforts it has been looking for strategic transactions to save the business.
After being rebuffed by AT&T in 2012, Leap sought deals with companies that, according to the details in the filing, are most likely MetroPCS and Sprint. However, during that time T-Mobile announced its purchase of MetroPCS and SoftBank announced its plans to acquire Sprint. Leap also tried to strike a deal with "a company in the satellite communications industry," most likely Dish, but those talks broke down in November 2012 when the satellite company indicated it did not want to acquire Leap.
Leap rekindled discussions with AT&T in early 2013, but Stephenson again rebuffed Leap. However, Stephenson soon changed his tune and by June 19, AT&T indicated it was interested in pursuing a potential acquisition of Leap in an all-cash transaction at $9.50 per share of Leap common stock.
Leap's board and its financial advisors discussed the offer, and Hutcheson and Leap's chairman, Mark Rachesky, agreed that Leap's management should pursue a higher price from AT&T. Over the next several weeks, Leap and AT&T engaged in negotiations over the terms of the deal. A critical moment came on July 8, when, according to the filing, Hutcheson and Rachesky met with Stephenson and another member of AT&T's senior management.
Rachesky and Hutcheson discussed "the value of Leap's business and how an acquisition of Leap would strengthen AT&T's position in the growing prepaid segment of the wireless market, the potential network, marketing and capital expenditure synergies, the effects on AT&T's spectrum position and the value of Leap's tax assets to AT&T." The parties held several hours of negotiations, and Stephenson agreed to increase AT&T's initial bid price of $9.50 to $15 per share of Leap common stock, a 58 percent jump. The companies announced the deal on July 12.
As BTIG analyst Walter Piecyk notes in a blog post, the filing helps explain AT&T's interest in Leap. According to Leap's filing, "the complementary nature of Leap's and AT&T's spectrum assets, combined with the addition of Leap's significant experience in the prepaid wireless business, its dedicated and knowledgeable employees, its distribution network and its well-known and established Cricket brand, will help AT&T accelerate the expansion of its prepaid wireless business and result in a combined company that is expected to have the scale and spectrum to better compete with other major national providers for customers interested in low-cost prepaid service."
AT&T will pay $1.2 billion, or $15 per share, to acquire Leap, but analysts have said that headline price hides other costs AT&T will assume, which will raise the total price of the transaction. AT&T Mobility CEO Ralph de la Vega said earlier this month that "the rationale behind the Leap transaction is basically to accelerate our entry into the prepaid segment much more so than we would have been able to by ourselves." He said after the transaction closes, AT&T expects to keep Leap's Cricket brand and distribution.
Leap will report its second-quarter earnings after the market closes on Thursday, but Moffett Research analyst Craig Moffett wrote in a research note that the "rate of decline [in Leap's recent filing] implies that Leap lost about [375,000] subscribers in the [second] quarter (subject to rounding error), making it the worst quarter in the company's history from a net adds perspective."
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