AT&T on Friday announced it’s buying independent carrier Leap Wireless Inc. (LEAP) for about $1.2 billion in a bid to scale up in its battle against goliath rival Verizon.
Leap’s shares will zoom up more than 100% on Monday, with a hefty premium built into the deal. This will be a windfall for Leap shareholders, who in recent years have suffered an eroding share price as Leap spent lots of money to build out its network but struggled to reach profitability. The San Diego-based provider has a sizable 4G network and client base that will give AT&T more network assets its effort catch up with Verizon’s larger 4G network.
Leap’s network covered about 96 million people in 35 U.S. states primarily under its Cricket brand of services operating over both 3G CDMA-based networks and 4G LTE, according to AT&T. The company has 3,400 employees.
The M&A is part of a frenzy in the telecom in recent years, as the wireless players look to amass the strategic assets for networks that are becoming more consolidated into the hands of just a few players. The search for growth is never-ending, and targets are becoming more scarce as the industry has consolidated and the wireless market has become more saturated. The top four wireless players: AT&T, T-Mobile, Sprint, and Verizon, control nearly 90% of the market in North America, according to wireless industry association CTIA.
At the same time, there is pressure to add capacity and spectrum in next-generation 4G, or LTE, networks. In recent years, Verizon got a jump on AT&T building out next-generation 4G networks, which operate at much higher data speeds, and AT&T has been in a race to catch up. At last count, Verizon covered about 270 million subscribers with LTE at the beginning of 2013, whereas AT&T was stretching to reach 200 million by the end of 2013. But AT&T has recently been beefing up its infrastructure and plans to have 250 million subscribers by the end of 2013, as it announced last year in an $14B investment plan.
The analysis of what AT&T wants with Leap isn’t complicated: It’s looking for scale in subscribers, spectrum, and 4G network coverage. It’s all part of the company’s catch-up plan.
This explains the recent scramble as carriers race to snap up network assets. Sprint recently announced a deal to buy Clearwire for $2.2 billion and Japanese telecom investor Softbank in turn acquired a 78% stack in Sprint for about $22 billion. AT&T finished buying up the rest of Alltel’s network this year (Verizon acquired a piece of Alltel’s network but was forced to divest other parts of it), and T-Mobile closed its mega-merger with MetroPCS in March.
Clearly the deals are getting harder to find. Leap was really the last mobile network of scale in North American. AT&T’s need for more network scale probably accelerated after its $39 billion bid for T-Mobile was blocked by the U.S. government in 2011.
On Wall St., expect to see several immediate reactions: First, there will be questions about the large volume of suspicious options trading before the Leap deal. Second, every fund manager and their cousin will scour the earth for the next wireless takeover target. Unfortunately, int he U.S., they are mostly gone, so investors may have to look overseas. Bloomberg reports on European telcos being ripe for takover.