Late Monday the Wall Street Journal reported that Leap had hired bankers to explore a sale of the company. Though JPM believes the company is actively seeking an acquirer, they believe a sale would be very challenging given deteriorating fundamentals and valuation hurdles.
- Low likelihood of near-term deal with PCS; valuation problematic. The ratio of Leap’s share price to Metro’s share price is currently 2.5, 9% below the bid Metro made in 2007. Leap is currently trading at 5.9x 2010E EBITDA, a premium to Metro at 4.6x; a 2.75 share ratio would imply a 6.1x multiple for Leap. In addition, amidst industry-wide pricing pressure, and deteriorating fundamentals, JPM believes that Metro would be unwilling to pursue a bid for Leap, even at current levels. A ratio of 2.0 could even be difficult to justify, as that implies 5.5x EBITDA for Leap, relatively unattractive given wireless fundamentals and peer valuations.
- Strategic benefit diminished. MetroPCS remains the most logical buyer of Leap; however, the firm believes the strategic value of a deal is more limited today. Both companies are experiencing substantial degradation in ARPU. Even as a combined entity, they believe they would maintain discount pricing, as competition with Sprint Boost Unlimited, Tracfone, and T-Mobile is likely to remain fierce. Firm acknowledges a combination would enable some synergies; however, a combined company is unlikely to provide pricing or cost stability to the industry, calling into question the usefulness of a merger. Furthermore, synergies could merely provide additional cushion for taking a more aggressive stance towards competitors, resulting in greater industry pressures. We believe initial synergy expectations associated with a merger with MetroPCS would be extremely difficult to achieve given the current industry dynamic.
- Other interested parties? JPM notes they are highly skeptical of AT&T, Verizon, Sprint, T-Mobile, America Movil, or other foreign buyers participating in an acquisition. Given deteriorating fundamentals and the high-churn nature of the business, they believe subscriber valuation would be minimal, leaving the company’s spectrum holdings as the most attractive asset. Needless to say, from an equity owner’s perspective, relying on spectrum valuation is problematic, at best, in JPM's view.
Notablecalls: This short albeit hard-hitting call is likely going to crush Leap Wireless' stock price today.
I'm guessing that by 10:00AM ET it's going to be trading around the $13.60 level & if that doesn't hold $13.20 is not out of the question.
This one is going to hurt.