Saturday, May 17, 2008

Leap: pride before the fall?

Last September, Leap rebuffed MetroPCS’s proposed merger, in which the younger rival proposed exchanging 2.75 shares of PCS for every 1 of LEAP. In one sense, Leap’s decision seems smart, because its shares are still worth more than Metro’s offer — at Friday‘s close, the offer would have been worth $59.76 but the stock ended at $61.09.

However, both shares are down (PCS down 24%, LEAP down 27%) since the deal was announced last Sept. 4. The relative market caps remain the same, but now Metro is worth $7.6b vs. $4.2b for Leap.

But the more serious problem is that the four major carriers have gone to unlimited service plans — which was the whole point of Leap’s Cricket service (later copied by MetroPCS). Yes, the Big Four want $100/month while Metro wants $40/month (unlimited voice, text messaging and voicemail). But they’ve been forced to respond with a family plan promo: two lines for $35, three for $30, or four for $25 ($100 total — get it?). Cricket is about $5/monh cheaper for comparable plans, and its roaming minutes are less than half the price of those for Metro (but only sold in bundles).

Still, the big boys are heading towards unlimited minutes. If Leap and Metro don’t build a national footprint soon, they’ll be toast. They need to move before the industry shifts from voice to data (since their customers and equipment are not well suited for data). Sprint is in too much trouble to buy either one, leaving only Verizon as a potential buyer

Leap and Metro are as compatible as two carriers could be (other than the bad blood between them, and the fact that Metro is based in Texas). In addition to similar business models and demographics, they also use Qualcomm’s CDMA networks (unlike the Sprint-Nextel nightmare) in 1900 MHz and soon 700 MHz.

The foot prints are nicely complementary, as the original MetroPCS offer made clear. From a personal standpoint, both carriers individually are useless, but together my wife and daughter (and maybe I) would jump for their California coverage. MetroPCS has the Bay Area, Sacramento Bakersfield, LA and. and Las Vegas; Cricket has San Diego and central California (Fresno to Modesto) as well as Reno and (soon) Las Vegas.

The two are starting to build out redundant coverage, so the savings from the combination are going down. Now that the 700 MHz auctions are over, speculation is that negotiations will resume. But then speculation about merger talks was spreading in December and October, too.

Asked twice during the analyst call earlier this month, MetroPCS Roger Lindquist neither confirmed nor denied an interest in resuming merger talks. He didn’t deny it, because it would have no credibility; but he didn’t confirm it, to avoid raising expectations of any near term solution.

At the beginning of the year, FierceWireless predicted that the merger will take place in 2008. So far, two other predictions are bearing out (spinout of the MOT handset division, and merger of Sprint and Clearwire WiMax properties), and the year is not quite half over.