MetroPCS proposes merger with Leap Wireless

Merger would build 5th largest wireless service provider in United States

MetroPCS and Leap merger would create the fifth largest U.S. cellular operator, covering most of the 200 top markets.

Wireless carrier MetroPCS has proposed a merger valued at about $5.5 billion with rival Leap Wireless. If completed, the merger would create the fifth largest U.S. cellular operator, covering most of the 200 top markets, according to a statement issued by MetroPCS.

Both companies focus on prepaid wireless services to customers with less-than-stellar credit ratings, including the youth market. The Dallas company has built up a presence in larger metropolitan areas, while Leap, is considered stronger in suburban and rural areas.

According to business wire reports, the two companies would have about 6.2 million subscribers if they combined. The new company would still be dwarfed by industry leaders such as AT&T, Verizon Wireless and Sprint Nextel, which each boast over 50 million subscribers in the United States. T-Mobile, the fourth-largest wireless carrier in the United States, has roughly 26 million subscribers nationwide.

The deal proposed by MetroPCS is actually a stock-for-stock tax-free merger, in which each outstanding share of Leap common stock would be exchanged for 2.75 shares of MetroPCS common stock. Based on current stock prices, and a valuation of $77.89 per share of Leap stock, MetroPCS estimates the value of the deal to be $5.5 billion. MetroPCS would also assume or refinance about $2 billion more of Leap’s current debt.

In August, Leap reported second quarter revenue of just over $350 million, a 52% increase over the same period a year ago. But earnings declined 57% because of rising costs and interest expenses. Net income for the quarter was $3.2 million, down from $7.5 million a year ago. The company said it added nearly 127,000 new subscribers in the quarter, less than the 160,000 analysts had expected. That brings its total to 2.7 million at the end of June 2007. A year ago, the company had 1.8 million subscribers.

Leap was originally a spin-off from San Diego-based Qualcomm, and focused on serving youth markets. It filed for bankruptcy in April 2003 but restructured and emerged from bankruptcy just over a year later.

Tole Hart, a telecom analyst from Gartner said he thought that the proposed merger might be the easiest way for MetroPCS to expand into smaller markets that have traditionally been Leap Wireless’ territory.

“Metro’s been in a few larger cities, and Leap has been in smaller cities,” he said. “So if Metro wants to expand into other markets, it might be cheaper for them to simply acquire another firm.”

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