AT&T's $1.2 Billion Leap into the PrePay Market

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Consolidation continues in the USA as AT T has announced its intention to buy the smaller regional operator Leap Wireless in a move that AT T said will jump start its expansion into the prepay market.

Under the terms of the agreement, AT&T said that it will acquire all of Leap's stock and wireless properties, including licenses, network assets, retail stores and approximately 5 million subscribers.

AT&T is offering USD1.2 billion for the company, and just under 30% of the shareholders have already said that they will vote in favour of the deal. AT&T is offering a hefty premium for the company though. It has offered to pay US$15 per share, compared to the market price US$7.98 per share just before the deal was announced.

As of April 15, 2013, Leap had $2.8 billion of net debt, but it is also sitting on federal and state net operating loss carryforwards (referred to as "NOLs") of approximately $2.7 billion and $2.1 billion, respectively, which could be used to reduce future federal and state income tax obligations.

Back in 2011, the company enacted a poison-pill that would essentially prevent any hostile bidder buying the company simply to get hold of the tax credits. In a separate statement, Leap said that the provision still applies -- except for AT&T.

In essence, including debt, AT&T is paying USD4 billion to buy a company that is sitting on tax credits worth USD4.8 billion that can be offset against future profits.

Leap shareholders will also receive a contingent right entitling them to the net proceeds received on the sale of Leap's 700 Mhz "A Block" spectrum in Chicago, which Leap purchased for $204 million in August 2012.

Leap currently operates -- under the Cricket brand -- a CDMA network, as well as a LTE network covering 21 million people in these areas, and has 3,400 employees.

AT&T said that it will retain the Cricket brand name, provide Cricket customers with access to AT&T's own LTE network, utilize Cricket's distribution channels, and expand Cricket's presence to additional U.S. cities.

The company aims to use the Cricket brand to support its own move into the prepaid customer market, which had been traditionally overlooked by the major networks.

Immediately after approval of the transaction, AT&T plans to put Leap's unutilized spectrum - which covers 41 million people - to use in furthering its own LTE deployment.

The transaction is subject to review by the Federal Communications Commission and the Department of Justice and to other customary closing conditions. AT&T expects the transaction to close in six to nine months.

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