Saturday, April 21, 2007

MetroPCS takes a giant Leap

Metro PCS (NYSE: PCS) had a successful IPO Thursday, selling 50 million shares at $23 each — gaining 19% on its first day of trading, and less than 1% on Friday. It was one of the few successful telecom IPOs in years, unlike (say) last month’s Clearwire IPO.

[Metro PCS]Metro PCS is a niche CDMA carrier whose gimmick is “all-you-can-eat” wireless voice and (now) text messaging for about $40/month. It offers phones from Motorola, Nokia, and Chinese manufacturer UTStarcom, among others. The reason no one has heard of it is because it serves only six major markets:

  • Northern California (Monterey-Santa Cruz, Bay Area, Sacramento)
  • South Florida (Miami-Ft. Lauderdale-Naples)
  • Central Florida (Tampa-St.Petersburg-Orlando)
  • Atlanta
  • Detroit
  • Dallas-Ft. Worth
At the end of 2006, it claimed 2.9 million subscribers. Seeking Alpha remains bullish on the company.

Metro PCS began service in 2002. If this story sounds familiar, it’s because this is a sequel (some would say a copycat) to San Diego-based Leap Wireless (NASDAQ: LEAP), which was created as a Qualcomm spinoff in 1998. Certainly Leap considers itself to be the pioneer in this unlimited-use model, to the point that last summer Leap sued Metro PCS for patent infringement. While Leap (brand name Cricket) got a four year head start, its growth stalled for many years. It reported 1 million customers in 2001, but only 2.2 million subscribers at the end of 2006.

[LWIN stock]What happened? As Leap’s founding CEO (and former Qualcomm COO) Harvey White explained in an interview last September, Leap suffered from terrible timing. It launched planning for vendor equipment financing, and then hit the perfect storm of the NASDAQ collapse in addition to the multibillion dollar vendor financing losses of Lucent, Nortel and others. As a result, Leap went into Chapter 11 in 2003. The company filed a reorganization plan rendering its original shares (NASDAQ: LWIN) worthless, eventually emerging from bankruptcy in the summer of 2004.

With the recent re-capitalization, Leap has begun expanding again to now have operations in 22 states, including its long-awaited entry last December into its home San Diego market.

[Cricket Logo]Of course, one threat facing both companies (as noted by author David Mock) is that the big boys will match their prices. Given the disincentives for cannibalization, I can’t see Verizon or Cingular(AT&T) doing it, but certainly T-Mobile and Sprint are potentially desperate enough.

The Wall Street Journal article (paid site) speculated:
Some analysts said Metro may eventually try to acquire Leap, creating an even more formidable competitor to the top-tier cellphone giants.
Leap has a market cap of $5.4 billion, while MarketWatch estimates the Metro PCS market cap at $7.9 billion. Assuming they can get past the animosity, it sounds like a merger of equals to me. At least they have compatible technologies, unlike Sprint Nextel or the McCaw/Cingular/AT&T migration from D-AMPS to GSM.

Graphic: San Diego Union-Tribune, Nov. 19, 2004

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