How Will This Acquisition Saga End?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Many on Wall Street had thought that Leap Wireless (NASDAQ: LEAP) could become the next Clearwire, and start an all-out bidding war in the quest for spectrum. However, there is now reason to believe that Leap investors could have the most to lose.

A look back

On July 16, I wrote an article “Should You Buy on This Opening Bid?”, in regards to AT&T’s (NYSE: T) opening bid to acquire Leap for $1.18 billion. My conclusion was that companies would, in fact, bid to acquire Leap and that investors were smart in buying Leap above AT&T’s bid price.

The basis for my opinion was that Leap is a better acquisition than Clearwire, yet AT&T’s bid is far smaller than what Sprint paid to acquire Clearwire. The bidding wars for Clearwire took the original bid price from $2.75 to $5, as both Sprint and DISH fought hard to buy the company. However, is the same level of competition present for Leap?

Unexpectedly, not interested!

Initially, I thought Verizon (NYSE: VZ) to be AT&T's largest threat in acquiring Leap. Verizon has more subscribers in the U.S. than any other telecom provider, and has been very active in acquiring spectrum.

Last year, Verizon finalized the acquisition of a 1200/2100 MHz spectrum, which is a fairly low frequency spectrum that can provide good data flow in congested areas. Leap’s spectrum covers 137 million people, but is only being used on 5.3 million subscribers. Therefore, Leap’s spectrum opens a door for significant expansion, and I thought Verizon would find the synergies very attractive.

It turns out that Verizon is not interested in buying Leap Wireless, as the company’s CFO disclosed this information to BTIG’s Walter Piecyk. Also, the company disclosed its lack of interest on its conference call.

Verizon already has the potential to build out its network more so than any other telecom company, so this interest wasn’t necessary, but it does hurt Leap’s chances of a bidding war.

Don’t expect a Clearwire repeat

DISH Network (NASDAQ: DISH) fought hard with Sprint for Clearwire. However, DISH was also fighting hard to acquire Sprint.

DISH lost its battle, and many believe the company would chase Leap. However, DISH already has a large spectrum, one that is undeveloped and is ready for use in a wireless network. Therefore, DISH’s primary goal was to acquire Sprint, and when it failed, it backed out of the Clearwire race altogether.

DISH may show some interest in Leap due to its mobile business. However, DISH wants subscribers, not a business with a lot of debt and a large spectrum. Sprint was attractive because it came with 55 million subscribers. Leap has only 5.3 million subscribers. Therefore, I view DISH’s level of interest as minimal, and would not bet on the company going head-to-head with AT&T.

DISH simply doesn’t have deep enough pockets to compete with AT&T; thus, I don’t expect them to try; I would view it as a bad sign that DISH has not yet expressed interest in Leap if you are a Leap shareholder.

What does this mean?

Verizon and DISH were the only other two companies that I thought may attempt to acquire Leap, but now, I view it as unlikely.

For Leap shareholders, this could be bad. AT&T’s opening bid was near $15; Leap is currently trading at around $17.29. Therefore, the stock could trade lower if no other buyers come to the table.

For AT&T, this could be a good development. AT&T needs Leap’s spectrum to free space in the flow of data, and Leap’s unused spectrum gives AT&T growth potential.

Of course, Leap shareholders could reject the initial offer, but with $580 million in short-term liabilities and total debt in excess of $3.3 billion, AT&T’s offer might be a little too good to pass up. Therefore, if I were holding at Leap’s current premium, I’d consider selling, and possibly moving to an investment in AT&T, which is the company that has the most to gain. 

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