While the two companies operate similar business plans, offering no-contract deals, and have held talks over the past four years, MetroPCS CEO Roger Linquist offered no explanation about why MetroPCS made the offer public rather than seeking agreement with Leap. He simply referred to constant speculation on a merger. This is the least best-kept secret on the street, he said.
While the two companies’ focus on lower income customers has led to them being referred to as subprime telcos, they both have faster growth rates than many of their larger competitors. Combined, they will have 6.2 million subscribers.
MetroPCS said that from 2004 to the first half of this year, it had enjoyed annual subscriber growth of 45%, and Leap 24%, compared with 15% for Verizon and 11% for AT&T Wireless. This has fed into earnings, and over the same period, MetroPCS said it recorded annual EBITDA growth of 66%, Leap 34%, while AT&T Wireless managed 27% and Verizon 23%.
The reason why analysts have long believed that the two companies belong together is that they have highly complementary footprints with little overlap, and they operate the same CDMA technology.
Based on preliminary analysis, MetroPCS said a merged company could create synergies of $2.5bn. These would be achieved a combination of market-level operating efficiencies and corporate overhead reductions. It said the new company would benefit from improvements in customer penetration and retention.
MetroPCS held an IPO in April this year. It said that Leap’s stock price had traded in part in anticipation of a merger between the two companies.
Under the proposed deal, each Leap share would be exchanged for 2.75 shares of MetroPCS common stock in a transaction that would give MetroPCS investors 65.4% and Leap shareholders 34.6% of the combined company. The merger is expected to be completed early in 2008.
MetroPCS shares rose 5.13% to $28.67 after the deal was announced. This would put a value of $78.76 on Leap shares under the proposed terms of the deal. The fact that Leap shares rose 14.94% to $83.33 at the same time, suggests that the market expects that Leap will be able to negotiate better terms.
Leap, which operates under the Crocket brand, was spun off from Qualcomm in 1998 but entered Chapter 11 in 2003 after financial problems. It began trading on Nasdaq in 2005.
