Should You Leap Into Action With AT&T?

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In another sign of the continuing consolidation in the telecommunications industry, AT&T (NYSE: T) recently indicated that it wants to scoop up the much smaller Leap Wireless International, Inc. (NASDAQ: LEAP).

The Goliath vs. David deal will probably benefit long-suffering Leap investors. The stock price had been on a downward spiral until a reversal occurred on news of the potential acquisition. While the company has been signing up new subscribers, and revenue is growing, it isn't profitable. That could change once AT&T comes into the picture.

Will the transaction, worth $1.2 billion in cash, also help AT&T? It has the potential to work out for two reasons (*):

1. AT&T needs more capacity in order to expand its mobile unit. Leap happens to own a healthy slice of the available wireless spectrum that AT&T needs for its 4G LTE technology.

2. The fastest growing segment of wireless is in pre-paid plans, and Leap is a big player in that area.

(*) A caveat of the deal is that AT&T will need to assume Leap's $2.8 billion in debt.

Sprint to the finish

Another transaction in wireless just wrapped up. The number three U.S. carrier, the newly reminted Sprint Corporation (NYSE: S), merged with the number three Japanese wireless provider, SoftBank. Nextel is gone from the Sprint corporate name now.

The deal will provide a much needed $5 billion cash infusion for Sprint to stabilize its balance sheet, and it also enriches shareholders to the tune of $16.5 billion. Not a bad payday all around. Expect Sprint to show signs of life when it doesn't have to service as much debt as it had before.

Sunset on the Verizon

The merger will allow Sprint to become more competitive with AT&T and the nation's top wireless company, Verizon Wireless, a joint venture of Verizon Communications (NYSE: VZ) and Britain's Vodafone Group PLC (ADR) (NASDAQ: VOD).

Rumors have abounded this year that Verizon Communications wanted to buy out Vodafone's 45% share of the combined wireless business. So far nothing concrete has emerged from all the hype.

Vodafone has been active in mergers and acquisitions, and recently made a bid for the cable company Kabel Deutschland to give it more exposure to the expanding German market. As long as it doesn't overpay, the deal should be a positive for them.

The increased cash flow will help fund its relatively generous dividend of about $2 a share. And at a trailing P/E of only 8 the stock is not expensive.

Verizon, although its shares have outperformed the market by a big margin over the last five years, probably needs to pump up sagging growth to keep its top ranking in the wireless industry as measured by subscribers. Twice in the past six quarters it has reported negative earnings, and the overall trend is down --- since 2008 EPS has declined about 80%. Keeping all the Verizon Wireless profits for itself may have been why it wanted to kick out Vodafone.


The potential AT&T/Leap deal is just the latest in a barrage of activity in the telecommunications industry. I also wouldn't be surprised if Verizon and Vodafone eventually come to an agreement regarding its joint venture.

Whatever happens, investors should keep a sharp eye out for any opportunities (or fallout) from these transactions.

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Mark Morelli owns shares of AT&T; and Vodafone. The Motley Fool recommends Vodafone. 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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