One of the most lucrative segments in the telecom industry are wireless services. The companies with the largest wireless networks and customer bases are the best-positioned to grow in the short-medium term. Verizon (NYSE:VZ) is the market leader at the moment, and AT&T (NYSE:T) falls slightly behind in terms of the network access and the customer base. The fierce price war in the telecom industry has increased the need of a larger customer base in order to drive revenue growth through larger volumes.
Expansion can be done through organically growing the user base and increasing the network coverage, or by acquiring smaller or struggling players in the same segment. AT&T has taken the second route, and the company acquired Leap Wireless International. Let's look at what this acquisition will bring to the company.
What Does Leap Do?
Leap is the sixth-largest wireless communications carrier that offers digital wireless services in the U.S. under the brand named "Cricket." Unusual to large wireless service providers, Leap's Cricket service provides its customers with unlimited wireless services for a flat rate, without requiring a fixed-term contract or credit check. The Cricket service is offered by Cricket, a wholly-owned subsidiary of Leap. The company also owns a major chunk of non-controlling interests in several other wireless service providers, that multiplies its network and operational yield. On the financial front, the company has been incurring losses for a couple of years, with net debt of $2.8 billion. However, the company has a substantial customer base of approximately 5 million subscribers and a strong network of wireless spectrum.
What will Leap bring to AT&T?
As I mentioned at the start of the article, there is a need to increase the user base in order to completely exploit the growth opportunity present in the segment. Leap allows AT&T to access around 96 million people in the 35 states - this part shows how the network will grow for the company. Leap's Cricket brand is a 3G CDMA brand, and the company also has a 4-G LTE network, which reaches 21 million people. So, AT&T will have the opportunity to market its own 4-G LTE services to another 21 million people, which should result in more subscriptions.
The strategy from AT&T is simple here - the company will continue with the current popular brands of Leap, and try to market its own products to the current user base of Leap. In fact, AT&T is going to try and enhance current products for Leap, as it is understandable that the company does not want to let go of popular brands, and it is likely that not all Leap subscribers will convert to AT&T. Synergies are extremely important for any merger/acquisition, and the chances of achieving desired synergies are higher in the mergers/acquisitions in the same sector/segment. We will see the financial strength of AT&T combine with the already established network of Leap, which should result in substantial synergies for the company. We believe AT&T will be able to extract more from the assets, as there will be no financial constraints.
Leap also has spectrum in bands PCS and AWS, which are complimentary to the current AT&T spectrum licenses - the spectrum covers 137 million people. At the moment, Leap's spectrum is under-utilized and will allow AT&T to further enhance its capacity and network coverage in its 4-G LTE deployment.
The company has received approval from the Federal Communications Commission for the acquisition. However, the FCC has asked AT&T to give up some wireless spectrum in few markets to ensure healthy competition. The company has plans to deploy high-speed access in areas where it is gaining new spectrum, and to allow customers of the Cricket brand to keep some low-rate plans and get trade-in credits for their phones when they migrate to the AT&T network.
AT&T will have to plan the packages with new demographics in mind, as the subscribers for the Cricket brand were from low-income segments. Some consumer groups have shown opposition to the deal, as they believe it will decrease competition in the market and they will have to pay higher rates. Some of the existing Cricket subscribers might not be able to afford AT&T plans.
The acquisition of Leap's business will allow the company to substantially enhance its user base and its network access. Furthermore, the unused spectrum will allow AT&T to reach more potential users and market its products to a larger set of consumers. We will certainly see considerable benefits of the deal over the next two-three years, as this acquisition will allow AT&T to gain ground on Verizon in terms of market share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.