AT&T: Better Equipped to Face the Competition

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

With every passing day, as the competition gets stronger, more and more companies are looking to integrate with other similar companies offering complementary product mixes. One reason could be that time is money, and by the time these companies organically develop themselves to offer what others are providing, it may be too late. Hence, acquisitions have started to take place more than ever. Recently, AT&T (NYSE: T) acquired Leap Wireless International (NASDAQ: LEAP) to better equip itself in the face of rising competition and to expand its subscriber base.

Following Sprint’s (NYSE: S) acquisition of Clearwire in the U.S. wireless industry, AT&T has been reported to have filed for acquisition of Leap Wireless. With the approval, AT&T will be able to control Leap’s stock and wireless properties, including licenses, network assets, chain of retail stores and roughly 5 million subscribers. Leap’s network includes roughly 96 million people across 35 states of the U.S.

Potential synergies to AT&T

Leap is best known for its Cricket brand. It is expected that AT&T will keep this brand name and expand Cricket's service offerings to other markets within the U.S. Leap’s network caters to 21 million people under the Cricket brand, offering 3G CDMA and 4G LTE network services.

AT&T plans to provide Cricket customers with supplementary access to AT&T’s 4G LTE mobile network. As a result, there will be greater competition, improved device choices, enhanced customer care and a substantially superior mobile internet experience for customers looking for prepaid wireless plans at a reduced cost. The two companies together will have the funds, scale and spectrum to fight against the big national providers. Cricket’s workforce, operations and distribution networks will assist in AT&T’s expansion and make its prepaid segment highly competitive.

This purchase covers spectrum in the PCS and AWS bands. It is a large complement to AT&T’s current spectrum licenses. AT&T intends to use Leap’s unutilized spectrum to further widen its 4G LTE deployment and provide extra capacity. This should increase the network quality for everyone.

The market position of its competitor, Sprint

On the other hand, Sprint recently launched The Sprint Unlimited Guarantee, which offers its customers unlimited talk, text and data for a whole lifetime. Customers will no longer need to worry about their wireless bill or controlling its usage. Also, customers can customize their package according to their usage and ease. This plan is being offered at quite a lower charge. Hence, Sprint’s customers will able to enjoy substantial annual savings as compared to AT&T, Verizon etc.

Sprint acquired Clearwire a few days ago, to strengthen its position in the 4G LTE market. This deal is expected to benefit the public at large, with the customers ending up with a faster and richer 4G LTE service. With the global LTE market entering its high growth phase, this merger will help Sprint in grabbing a major share of the expanding market.

Financials

Compared to the industry, AT&T is itself overvalued based on its P/E, but Leap is undervalued to a large extent as it has negative earnings. It may be the right time to buy AT&T as Leap becomes a part of AT&T. Leap’s EPS is reverting from the negative trend that it has followed. With the acquisition taking place, AT&T will be able to post higher earnings based on its strengthened market position and expanded service network. Hence, I would recommend buying this stock.

Based on its P/E, Sprint is currently an undervalued stock compared to the industry. However, taking a look at its negative operating margins, which continue to increase, can be a cause of concern for investors. The company has been unable to control the increase in its expenses. The ability to report earnings is very important. Keeping in view the new service package introduced by Sprint, the company will be able to enjoy the first mover advantage in this area. This will assist in turning the company’s negative earnings into profits. Thus, in my opinion, this stock should be purchased.

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Awais Iqbal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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