Gerard Hallaren's  Instablog

Earlier today, we heard a rumor that AT&T was considering purchasing Leap Wireless at a very hopeful $30.00 per  share.  We think economics argues against such a deal and even at Leap's current share price of $17.51 the economics would be challenging.   Making a deal less likely is that LEAP has a CDMA network while AT&T's runs on GSM. 

Leap's cost per gross addition was $201 in the June, 2009 quarter.  For comparison purposes we remind readers Sprint paid less than $140 per customer for Virgin Mobile.  We believe cost per gross addition is a reasonable benchmark to use when valuing prepaid carriers. 

In the unlikely event that LEAP's acquirer spent only enough money to maintain the current subscribers on the current network and based on last quarter's results, we would value each subscriber at roughly $620.  If this was truly strategic and complementary to a buyer, this price might become relevant.  However, with churn at 4.4%, the average life of a customer is short, less than 2 years.  Making it hard for anyone thinking longer term. 

At $30 per share:  with about 78 million fully diluted shares outstanding  and about $2.1B in net debt the company's enterprise value is $4.3 Billion.  Assuming the company's spectrum is worth what it cost (reasonable) that would have AT&T paying about high $770 per customer.  if the spectrum is worth twice what the company paid for it (aggressive) that would have AT&T paying a still high $620 per customer. 

At $17.51 per share (the current stock price) the economics are still tough.  Factoring spectrum at cost puts the price at $570 per customer, using our aggressive spectrum value shows a still high $421 per customer price.

With respect to LEAP's AWS spectrum we do not see AT&T as a natural buyer.   We would expect T-Mobile or Verizon to be willing to pay a higher price than AT&T as both T-Mobile and Verizon hold similar AWS spectrum.

No positions in any of these stocks.