March 10, 2011 / 6:11 PM / 9 years ago

UPDATE 2-Leap investor eyes board shake-up

* Pentwater cites mistakes by Leap management

* Leap shares up 10 pct (Adds analyst quote, Pentwater comment, share price)

NEW YORK, March 10 (Reuters) - Pentwater Capital Management is looking to shake up the board of Leap Wireless LEAP.O and has vowed to nominate three directors, citing what it called years of management mistakes.

Pentwater, which says it is the fifth-largest institutional investor in the wireless operator with ownership of almost 5 percent of Leap shares, complained about Leap’s rejection of a 2007 takeover offer by MetroPCS Communications Inc PCS.N and also accused the company of “incorrect operational decisions.”

Leap shares rose 10 percent after Pentwater released a letter addressed to the Leap board on Thursday, as some investors bet the letter would lead to management changes or a sale. At least one analyst was skeptical that would happen.

Pentwater criticized a poison pill measure Leap adopted to limit individual shareholder ownership to less than 5 percent, saying it “entrenches management and stifles shareholder voice.”

It noted that the board’s chairman controls almost 20 percent of Leap shares, under the umbrella of MHR Fund Management, and said this “largely insulates the board from constructive shareholder critique.”

Piper Jaffray analyst Christopher Larsen questioned whether Pentwater would have enough clout to bring about changes, since it would need support from larger shareholders.

Such support might be difficult to get “given that many (of the biggest Leap shareholders) have been long-term holders” of the stock, Larsen said.

Pentwater said Leap has “mismanaged its cost structure,” pointing to its higher number of employees and lower number of subscribers compared with peer MetroPCS.

It said Leap’s focus on broadband services has hurt the company’s free cash flow and said the company has mismanaged its handset inventory.

A Leap representative declined immediate comment.

Leap shares were up $1.30 at $13.80 after the comments.

The operator’s shares were still down 27 percent from where they traded in May 2010 as Leap has struggled to compete against rivals such as Sprint Nextel Corp (S.N) and MetroPCS.

Pentwater said its nominees include two former chiefs of multi-billion dollar telecommunications companies as well as its own Chief Executive Matthew Halbower. (Reporting by Sinead Carew; editing by John Wallace and Gerald E. McCormick)

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