from Near Earth LLC Vol 6, Issue 1, January 2010, in part:
"Next moves in the wireless endgame"
"metroPCS has demonstrated the best growth (30% yr/yr) in the industry
through the Great Recession – an impressive feat. It also has a financial
engine that makes a decent if unspectacular profit from lower revenue
subscribers despite withering churn (the highest of all the firms we
examined). How do they do it? In two words, cost leadership. From the
point of view of an acquirer, metroPCS brings substantial spectrum
holdings and low cost infrastructure to the table, along with a differentiated
and growing brand recognized for value pricing. With positive free cash
flow, metroPCS’s management can negotiate with suitors from a position
of strength, and as they transition to LTE they are likely to appeal to a
wider audience of buyers. With two substantial uncontracted brands of its
own, and operational issues to boot, we do not see Sprint as a likely
bidder for the time being. As such, we think the most likely scenario is an
acquisition by Verizon in the short term, or AT&T, Verizon or T-Mobile
later on when they are up and running with LTE.
Leap Wireless markets its Cricket brand of uncontracted wireless service
and at first blush looks much like a somewhat smaller version of
metroPCS. However, Leap has slightly lower growth (21%) and ARPU and
is significantly less profitable, due principally to scale effects. As a
consequence, when capex is factored in, the company continues to
expend its cash reserves, though their June 2009 secondary did buttress
them by $264 million. With over $600 million in cash and positive
operating cash flow, Leap appears to have adequate resources for its
budgeted capital program, and has indicated that it will adjust its capital
plans to live within the resources that are available. As it is somewhat
more levered than metroPCS, LEAP’s ability to issue additional debt is
relatively constrained.
From the perspective of a buyer, Leap is somewhat cheaper on a pre-
subscriber basis than metroPCS. In terms of the bidding dynamic, Leap’s
more levered balance sheet is actually an advantage. This is because
most of its enterprise value is tied up in debt, and as such (thanks to the
miracle of leverage) a small premium in enterprise value translates into a
large premium for stockholders – the people who get to vote on the deal.
In contrast, generating a similar premium for metroPCS’s shareholders
requires a buyer to bid at a higher premium on an enterprise value basis.
Given this overall backdrop, we believe that Leap is somewhat more
motivated to do a transaction sooner, and if recent press accounts that
Leap may be shopping for bankers to explore “strategic alternatives” are
true this could be the reason. From a technology and spectrum
perspective, Leap looks a lot like metroPCS, and we would expect the
potential suitors to be identical. As long as both metroPCS and Leap are
both independent, potential acquirers can be expected to play them off
against one another – a tactic that is likely to work better against Leap (the
more “motivated” target) than metroPCS.
While we have considered metroPCS and Leap as potential targets, we
would be remiss to not mention that the two firms previously tried to merge
(metroPCS offered to acquire Leap in a stock for stock deal in 2007) and a
reprise of that scenario is a possibility. While the geographic coverage of
the two company’s networks is complementary, and the combined firm
would enjoy substantial scale advantages compared to the separate firms,
With positive free cash flow, metroPCS’s management can negotiate with suitors from a position of strength.
As long as both metroPCS and Leap are both independent, potential acquirers can be expected to play them off against one another ... we remain skeptical that this combination can proceed. With its substantial debt load and cash needs, Leap is easier for a larger player to digest. We also wonder whether the substantial dilution that a stock for stock deal
would impose on metroPCS would make sense for their shareholders.
Looking further down the road, the combined firm would also be large
enough that it could be substantially more difficult for Verizon or AT&T to
get regulatory approval to acquire it, reducing the potential bidding pool by
50%. Assuming that hurdle could be cleared, the merged firm would
benefit from bidders playing off Leap and metroPCS against each other."
AI
