What Does a Combined Leap Wireless & MetroPCS Look Like? (LEAP, PCS)

This morning there was a somewhat surprising merger announcement, although some have speculated this merger was inevitable. 

MetroPCS Communications, Inc. (NYSE:PCS) has sent a letter to Leap Wireless International, Inc. (NASDAQ:LEAP) proposing a tax-free merger to create a fifth national wireless carrier. Under the terms of the proposal, each outstanding share of Leap common stock would be exchanged for 2.75 shares of MetroPCS common stock.  The recent stumble after Leap’s last earnings and the lowered outlookahead may help expedite a deal that might have otherwise been inreverse.

After it is all said and done, this would make approximately $5.5 Billion in aggregate equity value; and MetroPCS will assume or refinance approximately $2.0 Billion of Leap’s existing indebtedness.  MetroPCS believes the proposed combination could result in synergies with an estimated net present value of approximately $2.5 billion, which could represent significant further value to Leap’s shareholders of approximately $12.34 for each share of Leap common stock.  MetroPCS believes that since its initial public offering in April of this year, Leap’s stock price has traded in part in anticipation of a merger between the two companies.

MetroPCS believes a merger would achieve meaningful cost savings through market-level operating efficiencies and overhead reductions. MetroPCS’ and Leap’s existing market operations are complementary and MetroPCS believes that the expanded service areas would likely benefit from incremental improvements in customer penetration and retention and combined would reach the top 200 US markets. 

There is always the argument that after recent weakness this could be a predator being able to buy a more established company on the cheap.  But after the internals got worse at Leap after the last earnings this may be a hard point to argue against.  Wall Street is so far endorsing the thought of a deal right out of the chute.  MetroPCS Communications Inc. (PCS) shares are indicated up 3.7% at the open and Leap Wireless International Inc. (LEAP) shares are up over 10% at $80.50 or better out of the chute.

If this deal were to close immediately and at the stated offering share conversion of 2.75 to 1.0, a $27.50 price on MetroPCS would equate a $75.625 price.  So the belief must be that this is just a starting offer to combine operations.

Jon C. Ogg
September 4, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.