According to the recent press release, AT&T has completed its acquisition of Leap Wireless International after winning regulatory approval. Leap Wireless, the sixth largest U.S. based carrier, will strengthen the market position of AT&T and allow it to quickly build its presence in the increasingly lucrative pre-paid market. It's a great opportunity for AT&T to access Leap's unused spectrum that covers 41 million customers to expand its LTE network.
Cricket Brand is a Huge Success
Prepaid wireless provider Leap Wireless operates under the Cricket brand. AT&T plans to retain the Cricket brand name and will open up its fastest data network, 4G LTE, to Cricket customers. The reason behind the huge success of the pre-paid Cricket brand was the no-contract factor with a combination of simple, low-cost rate plans, a terrific lineup of smartphones, and a great network experience. The new Cricket will have access to AT&T's nationwide 4G LTE network covering nearly 280 million people. AT&T will gain access to Cricket's distribution channels and will be able to expand Cricket's presence to additional U.S. cities. Currently, Cricket's network covers approximately 97 million people in 35 U.S. states and Cricket had 4.57 million customers as of February 28th, 2014.
In addition to Cricket's operations AT&T also acquired spectrum in the PCS and AWS bands covering nearly 138 million people. These spectrums are intended to be used by mobile devices such as wireless phones for mobile data, video, and messaging services. This spectrum is largely complementary to AT&T's existing spectrum holdings and includes an un-utilized spectrum covering 41 million people. AT&T will immediately begin to put the un-utilized spectrum to use to support 4G LTE services for its customers. This additional spectrum will provide additional capacity and enhance network performance for customers using smartphones and other mobile Internet devices.
Quick Glimpse of Earnings
In 2013 the company grew its revenues to $128.8 billion, increased adjusted earnings per share by 8.2%, generated $34.8 billion in cash from operations and realized an additional $7.0 billion from the timely disposal of non-strategic assets. In addition to investing to expand and upgrade its networks the company also increased its quarterly dividend for the 30th consecutive year and for the second consecutive year it returned nearly $23 billion directly to share holders through dividends and share repurchases.
In 2013 the company's operating income for 2013 increased $17.598 billion due to a non-cash actuarial gain of $7.58 billion related to pension and post employment benefit plans in 2013 and an actuarial loss of $9.99 billion in 2012. Despite such tremendous performance the company faced continued decline in its traditional voice and data services, higher wireless equipment costs, and increased expenses supporting U-verse subscriber growth. The addition of Leap Wireless will help the company to boost its declining segment.
The U.S. wireless industry has been historically dominated by traditional postpaid plans where the customer pays for voice and data services on a monthly billing cycle and is bound by two-year contracts. However, over the last 36 months the wireless industry has seen significant changes specifically in the emergence of prepaid services. Some major U.S. carriers are seeing a slowdown in net subscriber additions ("adds") of postpaid customers while prepaid net additions are growing dramatically. I believe that a portion of the U.S. wireless market is moving increasingly from traditional postpaid price plans to prepaid plans (due to cheaper packages and its no-bidding contract feature), and creates a huge opportunity for companies with prepaid wireless packages.
According to Deloitte, prepaid offers better return on investment and is more attractive than postpaid. The cost per gross "add" (CPGA) for a typical prepaid ($120) customer is three to four times lower than the postpaid ($450) customer. Although the average revenue per user (ARPU) is lower in prepaid ($25 prepaid vs $56 postpaid) the payback period for prepaid is much shorter resulting in improved cash flow and less financial risk.
The telecom industry is characterized by fierce competition and the acquisition efforts by Sprint (NYSE:S) show how these companies want to consolidate their position in the industry through different measures. The deal between Sprint and T-Mobile (NASDAQ:TMUS) can have a considerable impact on the telecom industry. If the proposed merger goes ahead the price war might become more intense which might further bring the margins down for the companies. A decline in margins and revenues due to the price wars can be offset by some extent by the increased customer base.
Source: Company Financials
Now AT&T has aimed to increase its customer base through acquisition and decreased prices. The company has slashed its prices by $15 to make it $65 per subscription. The company also added 4.52 million new (prepaid) subscribers as well by acquiring Leap Wireless and gained the exposure of more than 40 million U.S. subscribers. The increase in subscriber volume will help the company to make up for the lost revenues through its price cuts.
Currently, the company has 7.38 million prepaid subscribers. By acquiring Leap Wireless the company will add 4.52 million Leap Wireless customers to its subscriber base and strengthen its market position against its competitors. The growth in its subscriber volume will also give more control to its pricing strategy and will help the company to lure more subscribers from its competitors as well. So I believe the company will see substantial growth in its number of wireless subscribers in the coming year. Furthermore, by grabbing additional bandwidth the company will have access into previously forbidden territory and this will help it to market its line of smartphones to a wider customer base.
Compared to its competitors and industry the company seems undervalued based on its multiples. The company's P/E of 9.6 is the lowest among its competitors and the industry. Moreover, the company is paying the highest dividend yield among its competitors which makes it a more attractive investment to investors.
The telecommunications industry is rapidly evolving from fixed location, voice-oriented services into an industry driven by customer demand for instantly available wireless services including messaging, video and voice. Moreover, the consumers continue to focus on plans that offer the best financial value and flexibility. This is another likely indicator that the growth in prepaid wireless will most likely increase in coming years.
In addition, 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 pre-paid services. In addition, this deal will give the company rapid access to new markets where AT&T has had limited or no exposure. Moreover, this will strengthen its subscriber base which is currently the key measure to gauging the success of telecom companies. I would recommend investors buy this stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by APEX Financial Consultants. This article was written by one of our research analysts. APEX Financial Consultants is not receiving compensation for this article (other than from Seeking Alpha). APEX Financial Consultants has no business relationship with any company whose stock is mentioned in this article.