Wireless sector rides wave of consolidation

September 2013 | FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

One of the last remaining major independent wireless operators in the US, Leap Wireless International Inc, has agreed to be acquired by AT&T Inc in a deal worth around $1.2bn.The deal marks the continuation of a recent wave of wireless sector consolidation.

AT&T’s $15 per share cash offer for Leap represents an 88 percent premium on the company’s closing price of $7.98 on 12 July. Including the assumption of Leap’s debt, the deal’s total value is around $4bn. Under the terms of the deal AT&T will sell off a block of Leap’s wireless spectrum in Chicago and will add the proceeds of the sale to the transaction price.

Leap’s spectrum holdings in large urban markets make the company a very attractive takeover target for AT&T, whose position in the lucrative prepaid mobile sector will also be aided by the acquisition. AT&T is currently the second largest wireless provider in the US. The company has around 107 million wireless customers but only seven million are prepaid. Prepaid services have been growing in popularity, particularly among urban and younger consumers, but AT&T has not had a big impact on this segment to date.

Leap is the sixth largest wireless carrier in the US, with a network covering approximately 96 million people across 35 states. Under the company’s Cricket brand, Leap operates both a 3G and 4G LTE network covering 21 million people, including five million prepaid customers. Leap, which will retain the Cricket brand following the merger, employs around 3400 employees across its various sites.

The purchase of the firmis the latest example of the widespread consolidation which has occurred in the hyper competitive US wireless market in recent years. According to data held by wireless market strategy consultancy iGR, the number of subscribers serviced by regional operators has fallen from 22.2 million in 2012 to just 12.5 million today. Once the Leap purchase has been completed, it is estimated that figure will drop to around eight million.

The largest players in the US wireless industry, including AT&T and number one US mobile carrier Verizon Wireless, which between them control roughly 70 percent of the market, have been jostling for position for some time. With extraordinary levels of growth in both smartphone and tablet based data traffic expected over the next few years as more people switch to fourth generation mobile networks, available wireless spectrum is already at a premium.

In July Softbank completed its acquisition of a 78 percent stake in Sprint Corporation, formerly Sprint Nextel, for $21.6bn. Sprint itself also overcame competition from Dish Network to acquire 4G network operator Clearwire Corporation for around $14bn in June. Equally, the merger of T-Mobile and MetroPCS, the fifth largest US wireless carrier, was completed in May, a move which significantly strengthened T-Mobile’s position in the industry.

Verizon has also been at the centre of an internal buyout struggle. Verizon Communications Inc and Vodafone Group Plc own Verizon through a 55 percent to 45 percent joint venture worth in the region of $250bn. For a number of years, Verizon has been a willing buyer and Vodafone has been willing to consider the sale of its stake in the company. However, no deal has been forthcoming; it is believed that a complete buyout of Vodafone’s stake in the company would involve a huge payout and a considerable tax bill that could negatively impact the company’s A3 credit rating. Continuing its potential spending spree, Verizon has also been rumoured to be interested in acquiring Canadian cellular upstart Wind Mobile for around $700m.

In 2011 AT&T agreed a $39bn deal to acquire competitor T-Mobile, but US antitrust regulators blocked the attempted merger. Some analysts have suggested that the wireless market is already top-heavy, with AT&T and Verizon holding a disproportionate share of the available spectrum. Regulators felt that this spectrum gap insulates the industry’s bigger names from competition from their smaller rivals. Critics of wireless sector consolidation believe that by allowing AT&T to acquire Leap, the market will become even more unbalanced, leading to narrower consumer choice and higher prices.

At the time of writing, the deal for Leap is still subject to review by the Federal Communications Commission and the Department of Justice, as well as other customary closing conditions. However, due to the comparatively small size of Leap, AT&T does not expect the deal to run into any regulatory difficulty. The company expects the transaction to close in early 2014.

The wireless industry in the US has undergone a number of formative changes over the past decade or so. Indeed, Sprint and AT&T were themselves both the products of smaller firm mergers. However, with the acquisition of Leap we could be seeing an end to this particular round of industry consolidation. With few smaller wireless carriers left to acquire, the industry’s major players will now be turning their attention to the Federal Communications Commission’s auction of new airwaves for wireless broadband scheduled for 2014.

Richard Summerfield