AT&T Inc. (T) announced late Friday afternoon they were buying out pre-paid wireless company Leap Wireless International Inc. (LEAP) at $15.00 a share, for approximately $1.2 billion in cash. Leap's shares skyrocketed on the news, more than doubling in price on July 15 to hit $17.07 a share. On the upswing Leap stock is trading at almost over 20 times normal volume, as analysts predict the deal could end up being worth closer to $17 a share.
AT&T will assume Leap's $2.8 in debt. But the company will also take over Leap's stable of 5 million subscribers and their popular Cricket brand.
It’s no secret AT&T has been looking to increase their market share. AT&T was in talks at the end of 2011 to buy out T Mobile for $38 billion, though those plans were scuttled after the Federal Communications Commission gave the proposed deal a big “thumbs down,” citing antitrust issues. AT&T instead went after Leap, a smaller, regional carrier, a move that is much more likely to be approved by the FCC. Final word from the FCC and Department of Justice should come down by late 2013.
As the economy contracted, the pre-paid wireless market exploded. While upstarts like Leap had a toehold in the industry, the major telecom companies are swooping in to consolidate. Sprint Nextel Corp (S) edged in on the low-end phone market in January, launching a prepaid service of unlimited texting and calling via their Boost Mobile brand for $50 a month. Virgin Mobile, whose current low plan is a relatively expensive $80 a month, acknowledged they need to slash to at least $50 to stay competitive.
With AT&T’s impending purchase of Leap, they move into a market that some analysts claim will surpass contract subscribers for the first time ever this year. NPD analyst Stephen Baker cites the fact that to be truly competitive, telecom companies "need to partcipate in all segments of the market." And pre-paid is growing fast, as most people who would have contract plans already do, while pre-paid taps into an entirely new customer base. Sales to prepaid customers rose 91 percent in 2012, while smartphone unit sales only rose 9 percent.
The move by AT&T further bolsters the already giant telecom company, and puts pressure on their competitors to band together. Sprint and T-Mobile US Inc (TMUS) are currently the third and fourth largest carriers, and this will add pressure to them to merge to stay competitve. All three lag behind Verizon Communicatiosn Inc (VZ), currently the largest carrier in the US. Upstarts like United States Cellular Corporation (USM) and NTelos Holding Corp. (NTLS) now face an even more well-quipped rival in their burgeoning regional markets.
AT&T's stock was down .61 percent to $35.59 a share in Monday trading.