In a bid to create the fifth largest cell phone carrier, MetroPCS has offered $5.5 billion for competitor Leap Wireless. MetroPCS is offering 2.75 shares for every outstanding share of Leap common stock. The deal values Leap stock at $77.89 per share, a 3.5 percent premium over the stock's price on Friday.
MetroPCS said in a statement that the premium is actually greater than that because it believes Leap, which only went public in April, has been "traded in part in anticipation of a merger between the two companies." MetroPCS went public in May, raising over a billion dollars.
In a letter addressed to Leap chairman Dr. Mark Rachesky and CEO Douglas Hutcheson, MetroPCS president and CEO Roger Linquist outlined the advantages of the merger. The merger is "compelling and would yield substantial immediate benefits to the shareholders of both companies," he said.
He identified $2.5 billion in value for a combined company, including "market-level operating efficiencies and corporate overhead reductions." The combined company would be a stronger competitor in the wireless marketplace, he said. Costs for customer acquisition and capital expenditures would be driven down and spectrum assets would be used more efficiently.
Linquist said that despite all the talk about operating efficiencies, employees would benefit from the merger. "We see great opportunities for the employees of Leap to join our team," he said.
A 'Bold Move' To Go National
Leap has had a checkered history. It began in 1998 as a spin-off of Qualcomm, focused on smaller, rural areas, but filed for bankruptcy protection in 2003. It was restructured and emerged from bankruptcy in 2004. Leap offers flat-rate mobile plans under the names Cricket and Jump Mobile. This year, the company announced plans to double its business by moving into new markets and growing in existing markets. It currently has a presence in 35 of the top 50 markets.
The public offer is a "little bit of a surprise," independent technology market analyst Greg Sterling said in a telephone interview. The two companies have similar strategies, targeting younger customers with attractive flat-rate pricing, he said. The problem for both companies is the strength of their networks.
MetroPCS sees "an opportunity to take subscribers away from Verizon and AT&T," Sterling said. "But as long as their coverage is spotty, they'll remain a second-tier player. This shows they have ambitions beyond that," he said. Sterling said the "bold move" shows MetroPCS is " trying to break into the national ranks."
For MetroPCS to achieve those ambitions, it need to deliver "a quality network and national scale," Sterling said. But quality can be just good enough, so long as the network is broad, Sterling said. "Younger users want cheap access to cell minutes and texting," he said. Unless there's a "real obvious discrepancy in quality," those customers will pick a plan on the basis of price over quality.
Could Force Flat-Rate Pricing
While Verizon, for example, has advertised heavily to create a "perception that they have the higher quality network," the major carriers will come under increasing competitive pressure from smaller but substantial players like a combined MetroPCS-Leap, Sterling said. "Eventually, competitive pressures will push the major carriers toward all-you-can-eat models," he added.
Julie Ask, a wireless analyst with Jupiter Research, pointed out that mergers among smaller carriers make a lot of sense. "There are a lot of advantages from scale," she said. "The more handsets you sell, the better variety that you can have, the more likely folks are to design games and ringtones and other custom applications for your customer base."
In addition, smaller carriers have had trouble competing on perks such as free network calling. "There are fewer network advantages of everybody being on the same carrier," she said. As for the $5.5 billion offer, "Leap may try to get more from MetroPCS and they may solicit other offers," Sterling noted. "I suspect something will happen here with Leap."