Leap Wireless Could Have Further Upside

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Shares of Leap Wireless (NASDAQ: LEAP) rallied well over 100% in after-hours trading on Friday. U.S. wireless giant AT&T (NYSE: T) has offered to acquire the company for $15 per share -- Leap stock closed Friday at $7.98.

But is there more upside in the name? Perhaps. Shares of Leap Wireless broke above AT&T’s $15 offer, to trade near $17.30. Clearly, some investors are expecting AT&T to sweeten the deal.

Recent history suggests a better offer

In just the last year, investors in the space have seen a number of major deals -- and if those are any indication, AT&T’s $15 bid might not be its final offer.

Take T-Mobile’s (NYSE: TMUS) efforts to acquire Metro PCS. After some big shareholders (like Paulson & Co) threatened to oppose the deal, T-Mobile was forced to sweeten the offer. Metro PCS shareholders ultimately received the same amount of cash and stock as before, but the new combined entity carried $3.8 billion less debt.

Shares of that entity, T-Mobile US, have performed spectacularly since the merger -- up over 50% since it began trading in early May.

Then there’s Sprint and Clearwire. Japan’s SoftBank was set to acquire some 70% of the company, and Sprint itself was going to buy the rest of Clearwire that it didn't already own.

But that was before DISH Network got involved. The satellite TV company has been buying up spectrum and spectrum related-assets since 2008 (it has paid about $3 billion for these assets over the years).

DISH Network tried to buy both Sprint and Clearwire to put its spectrum to work. DISH didn't succeed, but Sprint and Clearwire shareholders should be happy the company got involved. Sprint’s initial bid for Clearwire was only $2.90 -- it was forced to raise that offer to $5 after DISH submitted a series of rival bids.

SoftBank, too, was forced to make its Sprint offer more attractive -- raising the bid from $7.30 per share to $7.65.

What’s Leap worth?

AT&T is likely buying Leap for its spectrum. Last November, Leap’s CEO Doug Hutcheson admitted that the company wasn't using 60% of it, and was interested in deals to share spectrum.

By acquiring Leap, AT&T will control that spectrum, and will probably use it to bolster its expansive network. AT&T has over 100 million subscribers -- Leap has only 5.3 million.

Combined, an AT&T/Leap entity will still be smaller than Verizon, which has more than 110 million subscribers. Still, it should allow AT&T to strengthen its network, which still lags behind Verizon’s in terms of LTE coverage.

The question is how valuable is Leap’s spectrum? The company’s CEO has claimed its spectrum assets alone are worth $3 billion -- even though Leap’s market cap has traded below $1 billion since 2011.

AT&T’s offer only values the company at $1.2 billion.

A bidding war for Leap Wireless?

But, like the Sprint deal, could DISH start another bidding war? Analysts at Macquarie predicted that Leap would be acquired last week, however, they weren't expecting AT&T to be the buyer.

Rather, Macquarie was expecting a bid from DISH Network or T-Mobile. With DISH Network’s Sprint/Clearwire ambitions falling through, a bid for Leap might make sense; likewise, T-Mobile would benefit from owning Leap -- and with its rallying stock, could do it with a stock-for-stock deal.

Or, perhaps DISH would make a play for T-Mobile? It was rumored after the Sprint deal fell through, and T-Mobile head John Legere told CNet he was “intrigued” by DISH’s vision and was open to a combination.

More money to be made in the wireless business

AT&T’s bid for Leap may be attractive based on its market valuation, but if recent deals are any indication, the wireless giant may be forced to sweeten the offer.

T-Mobile, too, has been a great performer in just the last two months, but the nation’s fourth-biggest carrier might have further upside. A potential deal with DISH Network looms as a possibility.

At any rate, the consolidation in the wireless industry appears to be far from over.

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