Did Leap Wireless Get a Fair Price From AT&T?
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investors of Leap Wireless International (NASDAQ: LEAP) must be quite happy, as the company soared by 109% to nearly $16.70 per share in one day. The bullish momentum was due to the buyout announcement from AT&T (NYSE: T), which said that it would acquire Leap Wireless for around $15 per share, for a total transaction value of $1.19 billion. Is a $15 per share a good offer for Leap Wireless shareholders? Let’s take a closer look and find out.
Growing revenue, consistent losses and leveraged balance sheet
Leap Wireless, formed in 1998, is the provider of digital wireless services in 48 states and the District of Columbia under the “Cricket” brand. It currently has around 5.3 million customers, owning the wireless licenses covering 136.7 million POPs. Most of its operating revenue, $2.83 billion, was generated from service revenue, while the company's equipment revenue came in at only $241.85 million.
In the past five years, Leap has managed to consistently grow its revenue, from $1.96 billion in 2008 to more than $3.14 billion in 2012. However, it has still generated losses, staying in the range of $(148) million to $(872) million. While its operating cash flow has been consistently positive, the free cash flow has been consistently negative. In 2012, its operating cash flow was $182 million and its free cash flow was $(259) million. What makes me worry is its highly-leveraged balance sheet. As of March 2013, it had $324 million in equity, $667 million in cash and short-term investments, and as much as $3.3 billion in long-term debt. Moreover, the company also booked a huge amount of goodwill and intangibles, at around $2.14 billion.
A higher valuation than Sprint Nextel buyout
At $15 per share, AT&T placed a high valuation on Leap Wireless, at around 12 times its trailing EBITDA. The EBITDA multiple seems quite rich compared to the Sprint Nextel (NYSE: S) acquisition. Recently, Leap Wireless’ bigger peer Sprint Nextel agreed to be acquired by Softbank at around $7.65 per share, valuing Sprint Nextel at $21.6 billion. Previously, Sprint Nextel had received a $20.1 billion offer from Softbank. However, Dish Network joined the bidding war, raising the bid to $7 per share, or $25.5 billion in total value. Afterwards, Softbank increased its original offer to the total value of $21.6 billion.
Softbank’s offer was considered superior with the higher cash consideration of $16.6 billion, while the remaining $5 billion will go to the company in exchange for 78% ownership in Sprint Nextel. At the current offer, Sprint Nextel was valued at only around 5.4 times its 2013 EBITDA. In 2014, Softbank expected that Sprint will spend around $8 billion in capital expenditures, and then that amount will be reduced to $6 billion annually for the next four years. Softbank founder Masayoshi Son estimated that there would be around $2 billion in annual savings in the first four years due to the cost savings program.
AT&T expands its footprint on prepaid market
With the acquisition, AT&T is the owner of Leap Wireless’ licenses, network assets, retail stores and around 5 million subscribers. Moreover, AT&T could also utilize Cricket’s distribution channel and expand the presence of Cricket to additional cities in the U.S. According to AT&T, the acquisition will fast track AT&T into the highly competitive prepaid segment of the wireless industry. According to Forrester’s tech analyst Charles Golvin, AT&T could offer its customers more reliable and faster wireless data in congested areas with Leap Wireless’ spectrum holdings, satisfying long-term data demands. Currently, AT&T had around 107 million wireless customers, but only 7.1 million prepaid customers.
In the first quarter 2013, AT&T’s mobile Internet has driven the company’s wireless gains. Its mobile data experienced an increase of 21%, while the Wireless EBITDA service margin has expanded to as high as 43.2%, a decent improvement compared to the Wireless EBITDA of 42.3% in the first quarter last year. For the full year 2013, AT&T expected to generate mid-single digit service revenue growth. The company also has kept repurchasing its shares on the market. It estimated that it would keep buying back its shares under its new 300 million share repurchase program, accounting for around 5.5% of the company’s common shares outstanding.
AT&T is trading at $35.80 per share, with a total market cap of $192.67 billion. The market values AT&T at a lower valuation than Leap Wireless, at 9.07 times its trailing EBITDA. Income investors might love AT&T with its juicy dividend yield at 5.1%. However, investors should worry about its high payout ratio at 135%, meaning that the company has paid dividends higher than what it has earned in the past twelve months.
My Foolish take
Leap Wireless has experienced a consistent growth in revenue but consistent net losses and high amount of goodwill and intangible assets. Moreover, with the leveraged balance sheet, AT&T seems to overpay Leap Wireless at its offering price of $15 per share. Sprint Nextel is bought out at a much cheaper valuation. AT&T, despite a juicy dividend yield, is not my taste either because of quite high payout ratio.
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