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AT&T boosts spectrum with Leap purchase

Regulators may resist, but giant cellco is after AWS licences and LTE users - though perhaps not the prepaid base


Published: 15 July, 2013

READ MORE: M&A | US | AT&T | Leap Wireless | LTE

There is a postscript to the recent M&A whirl in the US wireless world, with AT&T adding further to its spectrum pile by agreeing to acquire Leap Wireless.

The prepaid carrier has been left somewhat stranded since its arch-rival, roaming partner and often-touted merger prospect, MetroPCS, tied up instead with T-Mobile. An acquisition by a larger player, therefore, makes sense for its survival, but may worry antitrust regulators, since it removes yet another player from the mobile market. The MetroPCS/T-Mobile merger was approved on the basis that it made both operators more viable against the big two, but the Department of Justice and FCC - which scuppered AT&T's plans to acquire TMo itself - could be less positive about one of those two giants snapping up another cellco itself.

If AT&T gets its way, and an alternative bidder, such as Dish, does not materialize, it will pay $15 a share in cash, valuing the smaller company at $1.2bn. AT&T will get all Leap's licences, networks, retail stores and about 5m subscribers but the main attraction will be the firm's AWS frequencies, which will push AT&T ahead in its ongoing battle for spectrum capacity. It already holds AWS licences of its own and plans to start building out LTE in that band once it finishes its current 700MHz deployment.

Leap's CDMA network covers about 96m POPs in 35 states and its LTE services currently reach 21m of those people. The AWS and PCS spectrum covers 137m POPs, so in addition to existing LTE users, AT&T gets some additional unused 4G frequencies covering 41m potential customers.

The other interesting aspect of the deal is whether AT&T will finally take the prepaid market seriously. Despite some recent halfhearted moves, the leading two operators have largely steered clear of the reduced margins of the pay-as-you-go sector, leaving it to an increasingly bitter price war between T-Mobile/MetroPCS, Leap and Sprint's various prepaid brands, such as Boost and Virgin. However, while spectrum will be more valuable than a low end user base to AT&T, it may be eyeing the increasing tendency of relatively high value subscribers to opt for prepaid deals, especially for second devices such as tablets or for family members.

"It's mostly about spectrum," Craig Moffett of Moffett Research told CNet. "They keep Leap's spectrum out of T-Mobile's hands. Most people thought T-Mobile would be the eventual buyer."

However, accommodating 5.2m prepaid, mainly low value (in AT&T terms) customers will create challenges, especially as the business is not growing - Leap lost a net 93,037 customers in the first quarter and posted a net loss of $109.6m. And of course, its 3G/CDMA network is incompatible with AT&T's HSPA(+) system. The acquirer will have to find ways to migrate those users to LTE as quickly as possible, or further subscriber losses in low-ARPU 3G may actually be welcome.

AT&T's own prepaid efforts have been lackluster. It does offer the Go pay-as-you-go service and recently started testing a new offering called Aio Wireless, but in the first quarter this year, it reported a net loss of 184,000 prepaid customers.

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