M&A buzz over Leap, MetroPCS gains momentum

BANGALORE (Reuters) - The slowdown at MetroPCS and Leap and the resulting drop in valuations could hasten a merger between the prepaid carriers or make them attractive targets for larger companies like America Movil (AMXL.MX)(AMX.N), Deutsche Telekom (DTEGn.DE) or AT&T (T.N).

A brutal competitive battle in the prepaid wireless market has resulted in an ongoing price war that is taking its toll on MetroPCS Communications Inc (PCS.N) and rival Leap Wireless International Inc (LEAP.O), setting the stage for potential consolidation in the segment.

National carriers like AT&T and Verizon Wireless -- a venture of Verizon Communications (VZ.N) and Vodafone Group Plc (VOD.L) -- have been showing increasing interest in the prepaid market, which is growing faster than the postpaid space.

MetroPCS and Leap used to be the sole providers of low-end unlimited prepaid services, where customers paid a monthly fee in advance for unlimited phone calls without committing to a long-term contract.

Players like Tracfone, owned by Mexico's America Movil, and Sprint's Boost have jumped in the fray, turning up the heat on MetroPCS and Leap.

The rising competitive dynamics could prompt Leap and MetroPCS to join hands in a deal that has long been anticipated by investors, analysts said.

"Consolidation makes a lot of strategic sense, given the current competitive environment," Soleil/Nelson Alpha Research analyst Michael Nelson said.

On July 28, Sprint Nextel Corp (S.N) said it would buy out smaller rival Virgin Mobile USA Inc VM.N for $483 million, pushing it further into the prepaid wireless market.

A deal is "highly imminent," said a portfolio manager at an investor firm, which owns shares of both Leap and MetroPCS. He declined to be named as the firm's policy does not allow him to be quoted by name in articles.

Billionaire Carlos Slim-owned America Movil, through its Tracfone unit, could be interested in acquiring Leap, helping it expand in the U.S. market, own a network and potentially offer a hybrid product offering, said the portfolio manager.

Tracfone rents space on the Verizon Wireless network, which is CDMA-based just like Leap's.

Another move some analysts have talked about is Deutsche Telekom unit T-Mobile USA, the nation's fourth-largest carrier, making an advance for MetroPCS.

"The pricing pressure in this part of the market is hurting T-Mobile. And they could do something to neutralize that," Pacific Crest Securities analyst Steve Clement said.

But the companies operate on different networks, limiting potential synergies.

Others say it could make sense for AT&T, the No. 2 U.S. carrier, to pick it up.

"They (AT&T) don't have play in that segment of the market. It gives them a play in that segment of the market," Clement said.

AT&T and Verizon are also likely to run into regulatory hurdles because of the views of the current Obama administration, Nelson said.

On September 2, shares in Leap were up more than 6 percent because of speculation that AT&T could acquire Leap. At least two analysts were skeptical that such a deal would occur.

Leap spokesman Greg Lund said, "We have previously stated that there could be merit in a strategic combination of Leap and MetroPCS, and our view on that has not changed." MetroPCS did not immediately respond to a request for comment.

'IN THE PENALTY BOX'

In 2007, MetroPCS made a $5.5 billion bid for Leap at an exchange ratio of 2.75, but was rebuffed.

Now, the current weakness in the two companies is all the more reason that a MetroPCS-Leap merger could happen sooner than expected, analysts said.

Analysts had initially expected MetroPCS and Leap to put their M&A discussions on hold until they completed their network buildout, expected to be over by mid-2010.

"Based on the dramatic shift in the competitive landscape and the haircut that MetroPCS and Leap have taken to their equity valuations, I do think that has accelerated the timeframe," Soleil's Nelson said.

"I won't be surprised if it's something they were currently discussing," Nelson said.

Since MetroPCS reported weak second-quarter results -- hurt by competition -- on August 6, its shares have fallen 33 percent. Leap shares are down 25 percent in the same period.

A merger could happen "relatively soon," said BMO Capital Markets analyst Peter Rhamey. The speculation is that it could happen within the calendar year, he said.

"Once you get a couple of transactions going, things can move pretty quickly," Rhamey said, referring to Sprint's bid for Virgin Mobile USA.

If MetroPCS were to acquire Leap at current levels, the exchange ratio would be 2.1 -- down from its previous offer. MetroPCS is likely to have to pay a premium to that. As of the end of August, Leap was trading at a premium on near-term estimates, Rhamey said.

"Neither company is on life support. (But) They may be in the penalty box with the Street and the market at the moment," Atlantic Equities analyst Chris Watts said.

(Editing by Saumyadeb Chakrabarty)