Regulators Probably Would Clear Leap-MetroPCS Merger

“I do not foresee significant regulatory problems,” said Rebecca Arbogast, analyst with Stifel Nicolaus. “Their coverage map, the markets that they serve, is essentially complimentary rather than overlapping.” Arbogast said that with the spectrum both added in the advanced wireless services auction they would have coverage in most major markets, but with less spectrum than the four major carriers. Both were major bidders in last year’s AWS auction. MetroPCS got the biggest prize: The 20 MHz licenses serving the Northeast.

Arbogast said a merger need not be completed before the January 700 MHz auction for the companies to pursue spectrum in that band. “It makes sense for them to figure out what they are doing in order to develop a bidding strategy,” she said. “They need to decide whether to do a joint bid or to bid independently.”

“I don’t see it having regulatory issues,” said a wireless industry lawyer. “There’s very little geographic overlap, if any, and both companies even combined have a relatively small percentage of the subscribers. I'm pretty sure government regulators would look at the merger as procompetitive… The two companies have a very disruptive business model that regulators would welcome.” In 2005, the FCC similarly welcomed the Sprint-Nextel merger, the attorney noted.

The FCC hasn’t imposed a spectrum cap, but conventional wisdom holds that the commission will scrutinize markets where a merged carrier has 70 MHz or more spectrum, out of concerns about market power. Divestiture is likely to be required when the combined company has more than 80 MHz. But that unofficial cap may shift as more spectrum becomes available. Arbogast said the two companies wouldn’t exceed 70 MHz in any market.

MetroPCS would take on $2 billion in existing Leap debt, the company said in the letter. MetroPCS would own 65.4 percent of the company; LeapPCS, 34.6 percent. “We believe a combination of Leap Wireless and MetroPCS is compelling and would yield substantial immediate benefits to the shareholders of both companies,” the letter said.

The combined company would offer unlimited prepaid service for a flat rate with no contract obligation, MetroPCS said. Linquist said the company needed to talk to Leap before discussing the merged company’s name, explaining that MetroPCS wants to “squeeze the trigger, not yank it.”

MetroPCS estimated merging savings and other benefits at about $2.5 billion, but CEO Roger Linquist said he couldn’t discuss timing until the companies talked. Chief Financial Officer Braxton Carter said the benefits would come not from cost-cutting but from going nationwide.

MetroPCS expects savings in operating costs and corporate overhead, with better penetration and customer retention across the merged company’s expanded service area, it said. MetroPCS has had churn problems due to customers moving out of market, a leak could be plugged by expanding the network’s footprint nationwide, Carter said. Customer acquisition costs and capital spending also could drop thanks to increased purchasing power with handset and equipment makers, it said.

“Nearly all” the top 200 U.S. markets would have network coverage, MetroPCS said. The companies have or plan to have operations in most of the top 25, it added. MetroPCS expects to expand its network into Los Angeles in September, and New York, Boston and Philadelphia in late 2008 or early 2009, it said. If Leap agrees to merge, integration will be “job one,” Linquist said. Network expansion will happen as opportunities arise, he said. At the outset, the merged company would have 6.2 million subscribers, making it the fifth-largest nationwide carrier, MetroPCS said. AT&T leads with 63.7 million, followed by Verizon’s 62.1 million, Sprint Nextel’s 54 million and T-Mobile’s 27 million.

MetroPCS hopes to close in spring 2008, Linquist said. If Leap agrees to merge, the deal will need approval by FCC and shareholders, he said. Shareholder votes will come in early 2008, he said. The company would see benefits from the merger in late 2009 at the earliest, after it makes good on spectrum won in 2006’s advanced wireless services auction, Current Analysis’ William Ho said.

MetroPCS decided it would be most “expeditious” to use a public letter to make its merger proposal since it gives shareholders an immediate look, Carter said. He declined to comment on whether MetroPCS had talked with Leap in the three months before the letter. The merger was a long time coming, Linquist said. MetroPCS and Leap Wireless have been in communication the past four years, he said. And shareholders and Wall Street “repeatedly have articulated their desire to see a business combination between our two companies announced before the end of 2007,” the MetroPCS letter said. Seeking a roaming agreement wasn’t an attractive option for MetroPCS, Linquist said. That deal wouldn’t offer “true integration” and wouldn’t be a “stand-in for the real thing,” he said.

Merging would benefit both companies, analysts said Tuesday. “A combination of the two companies makes strategic sense given similar business models and overlapping spectrum position,” UBS said. Only “ego” could delay a deal, Ho said. Leap might want more shares or could “jockey for more power” on the combined company’s executive board, he said.

Integration should be smooth, since the companies have similar business models and “minimal overlap,” Ho said. MetroPCS and Leap use CDMA technology and do not have networks in the same places. The biggest work will be combining the back office operations, he said.

But a merged company still would have limited coverage and a second-class image, Ho said. MetroPCS and Leap would need roaming agreements with Verizon, Sprint and Alltel, he said. MetroPCS also faces a perception that it caters to a downscale market, he said. If the company wants to compete with the top four majors, it should aim its prepaid, all-you- can-eat offering at value-oriented young people, he said.

A Leap Wireless merger could be the first of many for MetroPCS, said analyst Jeff Kagan. Mergers involving the top four carriers “may be slowing, but there is still an entire mid market which will continue to merge for the next few years,” he said. “We are in the early innings of what will likely turn into several mergers for MetroPCS.”

Leap’s stock price soared 15.13 percent in regular trading Tuesday. MetroPCS was up 4.98 percent.