Eighteen months after AT&T dropped its bid to buy T-Mobile in the face of federal antitrust opposition, the giant mobile carrier is once against aiming to snap up a smaller rival. Late Friday, AT&T, the nation’s second largest mobile carrier, announced its intention to purchase Leap Wireless for $1.2 billion in cash, in the latest example of consolidation in the wireless space. The deal faces a federal review, and public interest groups are already urging the government to block the transaction.
“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,” Harold Feld, senior vice president of D.C.-based consumer advocacy group Public Knowledge, said in a statement. “The wireless marketplace does not need more mergers and more concentration. Rather, all carriers should compete to win customers through improving their network quality, price plans, customer service, and handset selection.”
San Diego-based Leap Wireless, which operates under the Cricket pre-paid brand, is the sixth largest wireless carrier in the U.S., and its network footprint covers 96 million people nationwide, including most major cities. The deal would give AT&T a stronger foothold in the pre-paid market — where people can obtain wireless service without a contract — an area where AT&T is now relatively weak.
“The combined company will have the financial resources, scale and spectrum to better compete with other major national providers for customers interested in low-cost prepaid service,” AT&T said in a statement. “Cricket’s employees, operations and distribution will jump-start AT&T’s expansion into the highly competitive prepaid segment.”
Pre-paid wireless service is frequently used by low-income customers, younger people, and people with poor credit. “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,” said Feld.
The deal would also allow AT&T to assume control of Leap’s valuable wireless spectrum, which covers 41 million people around the country. Wireless giants like AT&T and Verizon Wireless are racing to obtain more spectrum — the radio airwaves that connect our mobile devices — as data usage soars thanks to the proliferation of smartphones and tablets. AT&T said it would immediately use Leap’s spectrum to bolster the telecom giant’s 4G wireless network.
Glenn Manishin, a partner at the law firm Troutman Sanders and a leading antitrust expert, pointed out that the Justice Department intervened in the Federal Communications Commission’s spectrum auction proceeding to stress that the FCC should build in safeguards to prevent dominant wireless firms from squeezing out smaller rivals. “Hence, there’s a significant risk that the same competition concern will arise in an antitrust review of the AT&T-Leap deal, as the principal assets being acquired appear to be spectrum licenses rather than end user customers,” Manishin said in an email.
AT&T’s proposed purchase price of $1.2 billion, or $15 per share, represents a hefty premium for Leap — about double the company’s value at the close of trading on Friday. Leap shares soared by over 100% — from $7.98 to $17.31 — in after-market trading following AT&T’s announcement. AT&T, which said it would keep the Cricket brand, would also assume $2.8 billion in Leap debt, bringing the total value of the deal to $4 billion.
Immediately prior to the deal’s announcement, options traders noticed irregular activity in Leap stock futures, according to the Wall Street Journal and Reuters, suggesting someone might have been tipped off in advance. Nearly one-third of Leap’s outstanding shares have already been pledged to support the deal, according to AT&T, which said that owners of approximately 29.8% of Leap’s shares have entered into an agreement to vote in favor. Hedge fund titan John Paulson’s investment firm holds about 10% of the company, according to CNBC.
AT&T’s acquisition of Leap would be just the latest example of accelerating consolidation in the wireless space. The proposed deal comes just days after Japanese telecom giant Softbank acquired Sprint, the third largest U.S. wireless carrier, for $21.6 billion. And earlier this year, T-Mobile USA, the fourth largest U.S. carrier, gobbled up Metro PCS in a $1.5 billion deal.
In 2011, AT&T announced a plan to buy T-Mobile USA for $39 billion, which would have allowed AT&T to vault over Verizon Wireless to become the largest mobile phone company in the United States. Because the transaction would have reduced the number of major U.S. wireless providers from four to three, public interest groups protested, arguing the deal would reduce consumer choice, increase prices, and lead to layoffs. AT&T insisted the deal would improve service quality for its users.
Ultimately, the Justice Department moved to block the deal, saying the combination of the country’s second and fourth largest wireless carriers would violate antitrust law and “substantially lessen competition.” AT&T subsequently abandoned its bid, and was forced to take a $4 billion write-off over the failed acquisition.
Craig Aaron, president of Free Press, a D.C.-based public interest group, urged the Justice Department and the FCC to reject AT&T’s proposal to buy Leap. “This is a smaller deal, but AT&T is sure to make the same false claims it tried with T-Mobile about how fewer competitors will be good for wireless customers,” Aaron said in a statement. “But this takeover would result in fewer choices, higher prices and job losses.”
Despite the opposition of public interest groups, however, AT&T’s Leap deal is unlikely to face the level of government resistance that the T-Mobile deal faced, because Leap is a much smaller carrier. AT&T said it expects the transaction to close in six to nine months.