Sprint, Leap left on the outside of T-Mobile/MetroPCS deal

The proposed merger of Deutsche Telekom's T-Mobile USA with MetroPCS (NYSE:PCS) has obvious ramifications for the two carriers, but the deal will also have major implications for the carriers left on the outside of the M&A bubble: Sprint Nextel (NYSE:S) and Cricket provider Leap Wireless (NASDAQ:LEAP).

Click here for a chart of T-Mobile and MetroPCS' combined spectrum, according to Mosaik Solutions

For Sprint, the deal represents a missed opportunity for consolidation. According to the Wall Street Journal, which cited unnamed sources, Sprint was in talks with T-Mobile about a possible tie-up recently, but the talks did not advance. And according to multiple reports, Sprint's board passed in February on the chance to acquire MetroPCS. The Journal reported that Sprint would have offered MetroPCS a 30 percent premium on its stock, but that the deal fell apart because Sprint's board felt the timing was not right.

According to a Bloomberg report, which also cited unnamed sources, Sprint is in the early stages of evaluating whether to make a competing bid for MetroPCS. The report said that Sprint began reconsidering its position on a deal for MetroPCS before the T-Mobile announcement was made public and could decide as soon as next week on whether to make a competing offer.

A Sprint spokesman declined to comment on the T-Mobile/MetroPCS deal and whether Sprint would oppose it.

Sprint stock has surged this year, stoking speculation among financial analysts that the carrier would make a deal. Sprint CEO Dan Hesse said last month the carrier would likely be a part of any significant M&A going forward, though he did not provide specifics. "I do think there will be consolidation," he said at an investor conference. "I would hope and expect that over the long term Sprint will take a very active role in that."

However, complicating any potential transaction is the fact that Sprint is in the middle of a complicated, multibillion-dollar network modernization plan called Network Vision. Hesse has said that his executive team is focused on the project, which will reduce Sprint's network costs, improve its CDMA network and allow it to deploy LTE.

As for Leap, the carrier has said it is also interested in potential deals. Leap CFO Jerry Elliott said recently the company is considering a wide range of strategic options, including a sale. The prepaid carrier has lost money every year since 2006. MetroPCS was seen by many as the logical partner to acquire or merge with Leap since both are smaller prepaid carriers; Leap turned down a bid from MetroPCS in 2007.

Leap's shares plunged 18 percent Wednesday on news of the T-Mobile/MetroPCS deal. The company declined to comment on the transaction, according to Bloomberg.

Leap has a much smaller customer base than MetroPCS--5.9 million compared with MetroPCS' 9.3 million. Leap is also lagging MetroPCS in LTE: Leap counts only one LTE market (Tucson, Ariz.) while MetroPCS counts 14 LTE markets and close to one million LTE customers. Further, if T-Mobile does complete its merger with MetroPCS, the combined company could put further competitive pressure on Leap.

"The challenge for Leap is that their business just isn't all that attractive on a standalone basis," Bernstein analyst Craig Moffett told Bloomberg. "Right now they're struggling to grow and they still aren't profitable. That asset has always made more sense in the context of a larger business."

For more:
- see this WSJ article (sub. req.)
- see this AllThingsD article
- see this Bloomberg article
- see this separate Bloomberg article
- see this separate WSJ article (sub. req.)

Special Report: T-Mobile USA and MetroPCS merge: Complete coverage

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