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By S. John Tilak
BANGALORE, Jan 27 (Reuters) - U.S. low-cost wireless carriers MetroPCS Communications Inc PCS.N and Leap Wireless International Inc LEAP.O will likely come to the table to revisit merger plans later this year when their rapid expansion into new markets eases off.
The rivals are having to contend with rising competition from larger carriers, underlined by Sprint-Nextel (S.N) unit Boost Mobile’s recent launch of a $50-a-month unlimited calling plan. This gives them one more reason to join forces: a common enemy. A merger would make the new company a distant No. 5 in the U.S. wireless carrier market and pit it head-to-head with national carriers in the fast-growing unlimited-calling space.
“Bringing these two together, you could cause a lot of distraction from the four other national guys,” Wachovia Capital Markets analyst Jennifer Fritzsche said. “You’re talking about almost a three-quarters of a national player at this point, with a much, much lower cost structure.”
The companies coming to the table for talks, Fritzsche said, “could be a late-this-year event.”
It is only a matter of time before they merge, analysts said. In 2007, MetroPCS made a bid, then worth about $5.5 billion, for Leap Wireless, but was rebuffed.
MetroPCS and Leap typically target youth and ethnic minorities with relatively lower earnings power by offering unlimited calls at flat monthly rates without tying customers to contracts.
The new Boost plan is seen as an attempt by Sprint to create a beachhead in what has been the turf of Leap and MetroPCS. Until now, the national carriers offered unlimited services at much higher price points.
“The announcement by Sprint represents more aggressive new competition than they were expecting,” Pacific Crest Securities analyst Steve Clement said. “And the two companies would be a more formidable competitor as a single entity rather than as separate carriers.”
The move from Sprint helps push Leap and MetroPCS in the direction of a merger, Clement said, adding that “it will make them think about it some more, I’m sure.”
Late last year, MetroPCS and Leap settled litigation and signed a roaming agreement, a move analysts said was a sign the companies were willing to talk to each other.
A joint company, after the two complete their expansion, would enable them to operate in markets that have a coverage population of about 200 million, or about two-thirds of the country. They are expected to have about 10 million subscribers by then.
Deutsche Telekom (DTEGn.DE) unit T-Mobile USA, the nation’s fourth-largest carrier, had about 32.1 million customers at the end of the third quarter.
There could be merit in further collaboration with MetroPCS, Leap spokesman Gregory Lund said in an e-mail. “We remain open to discussions concerning collaborations that are in the best interests of all of Leap’s shareholders,” he said.
MetroPCS did not respond to a request for comment.
Once operating predominantly in smaller markets, the companies are using the aggressive expansion to vault into the territory of the larger carriers.
MetroPCS, the bigger of the two, plans to enter New York and Boston in early 2009. It is present in Los Angeles and Philadelphia. Leap plans to enter Chicago, Philadelphia and Washington, D.C. in 2009.
“The probability of a merger increases once that launch activity goes down,” said Clement, who expects the launches to slow down in the second half of the year.
A merger would create savings opportunities. And only very few of their markets overlap.
“The two companies are a very natural combination. They’ve got complementary footprints, identical business models. So it would make perfect sense for them to come together,” Clement said.
As a larger provider, you have more leverage with the handset makers, Fritzsche said.
The expansion into new markets could change the equation in terms of who buys whom. “Leap is hoping they could outgrow MetroPCS and maybe they would be the buyer,” Stanford Group analyst Michael Nelson said. “For MetroPCS, they’re hoping they can outgrow Leap so that they can get a larger piece of the pie than what they bid for last year.”
The chances of a successful acquisition would not be hurt much by the credit crisis as it is expected to be an all-stock deal, which would not require raising any financing.
It might all come down to the price, an area where the two companies did not see eye to eye the last time, when MetroPCS offered 2.75 of its shares for each Leap share.
Leap is trading at 6.6 times Stanford Group’s 2009 EBITDA estimate, and MetroPCS is trading at 7.1 times, Nelson said.
The spread between the stocks would be more relevant than the valuation multiple, Nelson said. The greater the discount at which Leap trades to MetroPCS, the more attractive and likely the potential merger becomes, he said. (Additional reporting by Sinead Carew and Ritsuko Ando in New York, Editing by Deepak Kannan)