MetroPCS, Leap Merger Could Happen before Thanksgiving

MetroPCS largely reiterated its offer’s benefits in a reply release the same day. “Leap’s response does not change our firm beliefs in the strategic and financial merits of our proposal,” CEO Roger Linquist said, adding that shareholders want the deal. “Leap’s Board is ignoring the will of the shareholder base.”

“This is not a final rejection, but the next volley in… continued negotiations,” said Lehman Brothers analyst Brett Feldman. Current Analysis’s William Ho agreed. “They want more money,” he said, but Wall Street “wants the deal done.” The talks probably will turn private, with no public update until the companies report third quarter results, Feldman said. Since 700 MHz auction applications are due this fall, the deal should be signed by Thanksgiving, he said. FCC anti-collusion rules require that companies participating in auctions stop merger and acquisition activities. Raymond James analysts disagreed on the deal’s likely speed, noting Leap’s hostile rebuttal.

MetroPCS probably will bid more, but only slightly more, analysts said. “We expect MetroPCS to remain disciplined, but believe its offer could go modestly higher” given long- term opportunities, said Baird analyst William Power. The deal’s logic and lack of other bidders will keep the price down, Feldman said.

MetroPCS’s Sept. 4 merger bid caught Leap off-guard; it was “put off” by the “unsolicited offer,” Hutcheson said Monday in a conference call. It took Leap nearly two weeks to reply because it “needed time to get appropriate advisers” and properly review the proposal, he said. Leap didn’t have time for an “adequate analysis” of merger synergies on which to judge MetroPCS’s estimates, but it found the valuation “inadequate,” he said.

Leap should have expected the bid, MetroPCS said. In the past two months, the companies have held talks on merger prospects, it said. But Leap shot down those talks with “highly unrealistic valuation expectations,” it said. MetroPCS’s proposal, which would give Leap shareholders 34.6 percent of the company, “significantly discounts the contributions Leap would make to the combined company,” Hutcheson said. “Leap would bring the larger share of the licensed population and more than half of the covered populations that would be served.” Nor does MetroPCS’s Leap valuation account for Leap’s higher revenue per customer, Hutcheson said. Leap’s average was $1.77 higher in quarter one and $1.95 higher in quarter two, a gap that will be hard to close near term, he said.

But Leap’s average should be taken with a grain of salt, said Baird analyst William Power. Regardless of Leap’s “higher-than-average” figure, Metro’s margins have been higher, he said.

Hutcheson voiced doubt about MetroPCS’s future. Much of MetroPCS’s long-term success hinges on launches in Los Angeles and New York, both of which have seen delays, he said. Those launches are “on track,” MetroPCS said. Networks launch Wednesday in Los Angeles, with launches expected in New York, Philadelphia and Boston in late 2008 and early 2009, MetroPCS said. Leap also derided MetroPCS’s broadband plans. MetroPCS has “only recently begun to seriously contemplate meaningful broadband activities,” indicating it may incur “substantial costs and possible delays in launching any such services,” Leap said.

MetroPCS’s announced management transition is another concern, Hutcheson said. MetroPCS CEO Linquist is leaving the company for health reasons. “Without an articulated path to accomplishing and integrating such a major transaction, much of the value proposition and the resulting synergies that you have proposed become largely illusive,” Hutcheson said. Fear of Linquist’s departure is warranted “if you are in the school that his brain is behind all of Metro’s success to date,” analyst Ho. But the bigger concern is that Metro is still looking for a successor, he said.