AT&T’s Acquisition of Leap Wireless

This past week, it was disclosed that AT&T is acquiring Leap Wireless for $1.2 billion. With the acquisition, AT&T will acquire Leap’s 5 million customers as well as their valuable spectrum.

While the headline price and the rapid rise in Leaps’s stock price (88%) suggest an overpriced deal, a closer look at the numbers suggests otherwise. Leap currently has $3.3 billion of outstanding debt, so a deal to purchase the shares at $1.2 billion results in a total valuation of $4.5 billion.

Leap’s EBITDA is $507 million for the trailing twelve month period as of March 31, 2013. This results in an effective EBITDA purchase multiple of 9 times EBITDA. This is hardly a stratospheric level for a company with $3.1 billion of revenue with assets that are strategically important to the acquirer.

With this acquisition, AT&T improves its spectrum position dramatically as LEAP’s spectrum covers 137 million people. This improves AT&T‘s ability to scale through adding new customers and services.

If AT&T can use the added spectrum to drive its base business growth rate, this will be accretive to AT&T’s overall business value. On its face, a $4.5 billion purchase price for 5 million customers equates to $900 per subscriber.

As a pre-paid company, Leap does not have long-term contracts with its customers so it is not possible to compare this price per subscriber to other acquisitions with long-term contracts on an apples to apples basis.

Nonetheless, $900 per subscriber, provided the underlying trend in net gain in customers is positive, seems reasonable. While a pre-paid card suggests onetime usage, customers do reload and utilize the service over an extended period.

In addition, there is value for AT&T in the customer accounts as they are good candidates for cross sale of other services. The real issue for this acquisition is the rate of customer attrition and the downward pricing trend.

As long as the Leap customer attrition and service pricing trends are stable, the deal should work well for AT&T. My guess is that the value of the spectrum alone is significant so as to buffer any unforeseen weakness in the Leap base business.

While many analysts see this deal as a sign as an overpriced telecom market, we see it as a reasonably priced deal that brings scale, new customers and valuable assets to the acquirer.