AT&T's Proposed $1.5 Billion Leap Wireless Buyout Is Hardly a Slam Dunk

By Wayne Rash  |  Posted 2013-07-16

AT&T's Proposed $1.5 Billion Leap Wireless Buyout Is Hardly a Slam Dunk

When AT&T announced on July 12 that it had reached an agreement to acquire San Diego-based Leap Wireless, it marked the consummation of a very long series of discussions with the small prepaid carrier.

The agreement, which would include all of Leap's facilities, licenses and spectrum as well as the customer base, would cost AT&T about $1.5 billion. AT&T would get the Cricket trademark along with everything else.

This acquisition mirrors T-Mobile's recent purchase of MetroPCS, which closed earlier in 2013. Like the MetroPCS deal, AT&T would get a Code Division Multiple Access (CDMA) network in which customers are now getting low-cost cell service with no contracts. Also like the MetroPCS deal, AT&T will have to move that existing customer base to new GSM handsets capable of working on AT&T's 4G Long Term Evolution (LTE) network.

But there are differences. Notably for AT&T, Leap Wireless has substantial unused spectrum holdings that are complementary to AT&T's own spectrum (meaning they're on nearby frequencies). In addition, Leap Wireless is tiny, so the cost of the acquisition will be relatively low. All of this sounds nice. But will this deal actually happen? Maybe not because it's not necessarily a slam dunk.

Before AT&T can acquire Leap, it must go through the antitrust approval process with the U.S. Department of Justice, and it must be approved by the Federal Communications Commission. This means that groups opposed to any such merger will have the opportunity to formalize their opposition, and it means that other potential investors may try to disrupt the deal (Dish Networks, perhaps?).

What's also different is that while T-Mobile's deal with MetroPCS went through with little opposition, AT&T is less likely to have such an outcome. The most obvious reason is that AT&T is far larger than T-Mobile. It's already had its previous attempt at merging with a smaller company shot down, and some groups see AT&T as less friendly to consumers.

One of the groups leading the fight against the AT&T attempt to buy T-Mobile in 2011 has already noted its opposition to the Leap Wireless deal. "AT&T already has more wireless capacity than it needs to serve its customers, and it should focus on using what it has rather than continuing to try to buy out competitors," said Harold Feld, senior vice president of Public Knowledge, in a statement. "The wireless marketplace does not need more mergers and more concentration."

Feld noted that Leap Wireless, the fifth-largest wireless carrier in the United States, serves mostly low-income people, people with poor credit and people who want to do without the annoyance of a wireless contract.

AT&T's Proposed $1.5 Billion Leap Wireless Buyout Is Hardly a Slam Dunk

"If AT&T is allowed to remove Leap from the market, the customers it serves, particularly minority and low-income communities, will be disproportionately affected, and might have nowhere else to go."

But in reality, those people do have options. T-Mobile has been aggressively marketing its contract-free and prepaid plans that substantially undercut AT&T's plans. AT&T has already begun responding to T-Mobile's push with its own prepaid plans and recently with its own frequent-upgrade plan, called Next. At first look, it would appear that AT&T is doing more than simply trying to pick up Leap's spectrum and dump its poor and credit-challenged users out into the cold.

As you might expect from today's telecom environment, AT&T's announcement loosed a round of wild speculation among Wall Street analysts, some of whom seem to have lost their grip on reality. Regardless of what AT&T does, this merger isn't happening now. It doesn't currently involve any company other than Leap Wireless. And it doesn't necessarily mean that we're on the verge of some kind of apocalyptic buying frenzy that will suck the entire wireless industry into a monopolistic black hole as some analysts might want you to believe.

But that also doesn't mean that other acquisitions won't happen. Dish Networks has been looking around for deals and could decide to offer itself and its spectrum to AT&T. Because Dish isn't a wireless carrier, a deal between Dish and AT&T would face far less scrutiny than the announced deal with Leap. It's also possible that SoftBank, once it gets farther along in digesting Sprint, may look for another carrier. It's even possible that T-Mobile will look for another deal, although right now that carrier is just starting to incorporate MetroPCS.

Given the difficulty and scrutiny that goes along with a wireless telecom merger these days, it seems unlikely that there will be the sort of mania that some in the financial community seem to think there will be. The DoJ and the FCC move with deliberate speed, meaning even a fairly simple merger with little opposition moves at a snail's pace. Mergers and acquisitions between larger entities will go even slower.

Right now it's impossible to say whether AT&T will be successful in acquiring Leap. There's already opposition, and the announcement is only a few days old. But there's no question that AT&T has learned something from the attempt to buy T-Mobile. But is it enough? There's no way to know now.

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