MetroPCS offers more than $5 billion for Leap

NEW YORK (Reuters) - MetroPCS Communications Inc made an unsolicited offer on Tuesday to buy smaller rival Leap Wireless International Inc for about $5.5 billion in stock, seeking to fend off competition from larger U.S. mobile service providers.

A Leap spokesman said the company was reviewing the offer from MetroPCS and had no further comment.

Both operate in the low end of the U.S. wireless market by offering customers unlimited calls for a flat rate, instead of seeking longer-term contracts like far bigger rivals such as AT&T Inc and Sprint Nextel Corp.

MetroPCS and Leap face increasing competition from national mobile service providers, and a merger would make sense both to combine geographic coverage and create economies of scale.

"They're all pushing deeper into these segments -- it's very important for MetroPCS and Leap to merge to have a very compelling footprint to sell to their customers," said Kevin Roe, an analyst at Roe Equity Research.

In a letter to Leap's board of directors dated September 4, MetroPCS offered 2.75 of its shares for each Leap share. Based on Friday's closing stock prices, that makes the bid worth $75.04 per Leap share, or a 3.5 percent premium.

The news drove Leap shares up 15 percent to $83.46 on the Nasdaq. Arbitrage traders said the sharp rise indicated MetroPCS's bid was being viewed as an initial offer that could be raised in order to persuade Leap to accept the deal.

Jefferies & Co analyst Romeo Reyes said the offer was 8.5 times Leap's estimated earnings before interest, tax, depreciation and amortization, below the nine times EBITDA multiple of other recent U.S. telecoms deals, namely Dobson Communications Corp and Alltel Corp.

"Leap has a significantly higher growth rate than these rural operators and should receive a premium valuation to these transactions," Reyes wrote in a note to clients on Tuesday.

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MetroPCS shares rose 4 percent to $28.41 on the New York Stock Exchange. Based on the latest share prices, the proposed deal is worth about $5.5 billion.

"We have talked over the years about how much sense it would be to combine our companies," MetroPCS Chief Executive Roger Linquist told Reuters in a phone interview.

He said the main reason to buy Leap would be to expand geographically to better retain customers, while also cutting costs on back office and other operations. Dallas-based MetroPCS has 3.5 million customers, and San Diego-based Leap has 2.7 million.

MetroPCS said it expected the merger to create synergies of about $2.5 billion, or an additional $12.34 per share for Leap shareholders. It did not give a time frame or elaborate further.

The two combined would have a presence in nearly all 200 U.S. markets, but a cumulative 6.2 million subscribers would still be much smaller than the top U.S. mobile providers.

AT&T, Sprint, Deutsche Telekom's T-Mobile USA, AllTel and Verizon Wireless -- owned by Verizon Communications Inc and Vodafone Group Plc -- have customer bases ranging from 12 million to more than 60 million.

Linquist said the timing of the MetroPCS offer was partly prompted by the availability of stock currency since its April initial public offering. The proposed share swap was not forced by the recent credit crunch in financial markets, he added.

MetroPCS said it would like to enter a period of due diligence soon and close the deal next spring.