Leap Makes a Leap For the Sky

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This week, one of the stocks made a jump out of nowhere. After being sold below $8 for more than a year Leap Wireless International (NASDAQ: LEAP) rocketed up to $17 in a matter of just 3 days. This excitement in the investors to buy leap wireless was raised by the recent offer made by AT&T (NYSE: T)the second largest player in the U.S. wireless market, to buy Leap Wireless. The offer price quoted by AT&T was $1.2 billion and the deal is pretty much set, but there's still a chance that some of the other giant wireless carriers might jump in and start a bidding war. Let’s take a closer at the current scenario of Leap and some of the giants in the industry.

Introduction to the company’s operations

Leap Wireless is a wireless communications carrier that offers digital wireless services in the U.S. under the brand name Cricket. It has a modest subscriber base of 5.5 million customers, and it operates through a network of 4000 retail outlets and dealership stores all around the U.S., along with a growing presence on the web. The company offers pre-paid wireless services to its customers with an approach of ‘no contracts, no limits.’

The agreements

The consolidation of the wireless industry in the U.S. started somewhere in 2011, when AT&T tried to acquire T-Mobile (NYSE: TMUS). This deal was never completed due to some legal issues, and after some time MetroPCS conducted a merger with T-Mobile. This increased the market for T-Mobile, and through this reverse merger, it bypassed the lengthy and complex process of going public. For the first time in the U.S., the stock of T-Mobile combined with MetroPCS was traded on the NYSE under the ticker TMUS on May 1.

Following suit, other wireless carriers are also considering their options to consolidate their networks. That is why AT&T has made another move this time towards leap wireless. It is taking on Leap with a cash payment $15 per share accumulated to approximately $1.2 billion. This would surely increase the customer base of AT&T, but also it would allow it to own the wireless airwave spectrum of Leap, which is primarily what AT&T is after.

The spectrum was acquired by Leap from Verizon for a payment of $204 million. According to the deal, along with the $15 per share cash, AT&T would also sell a block of Leap’s spectrum in Chicago and the proceeds from sales will be added to the transaction. This means that the final value for Leap is dependent upon the fact of how much AT&T can generate through the sale of Leap’s spectrum.

Gains and possibilities

Well, like I said earlier, for AT&T this deals holds the spectrum of wireless airwaves owned by Leap and its 5.5 million subscriber base. The PCS and AWS spectrum bands, which cover 137 million people, will help AT&T boost its LTE capacity. It would further help in expanding the pay-as-you-go market of AT&T, where subscribers don’t have long term contracts. On the contrary, for Leap this deal has an upside in shape of the vast resources of AT&T and the customers of its Cricket brand wireless services would be able to use the broader LTE network capacity of AT&T.

The stock price of Leap has shot to $17.28 now, which is more than the per share offer made by AT&T. Furthermore, the sale of spectrum proceeds would also come to Leap, which if priced at previous years value of $204 million would be about $2.50 per share. Some of the people consider that the value of the Chicago spectrum would be more than what it was last year and Leap would get a good chunk from its sale. If that is the case, then the scenario suggests that the value of Leap is more than what AT&T has offered and thus another bid is being anticipated by some other large wireless carrier. 

Even though that most of the people think that that ‘large wireless carrier’ would be T-Mobile, I think otherwise. The reason for this is that T-Mobile is going on pretty well right now. Its service plan i.e. JUMP, is widely famous among mobile users. Its flexibility in up gradation is quite popular and helps users to jump to different smartphones twice a year. Moreover the deal with MetroPCS has provided it with enough footing that Leap may not seem a worthwhile option to T-Mobile.

Final assessment

This deal was surely in favor of the people who had invested in Leap Wireless. But the uplift of Leap's stock has not ended just yet. With the expectation of a profitable sale of its spectrum, we can assume that the share price will increase. Also the scenario of a counter-bid by another player in the market is highly likely right now, and even that might also effect the share price positively. So, I guess you can invest some more into this stock for some time.

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usman iftikhar 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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