Leap Acquires Denali – Analyst Blog

Leap Wireless International Inc. (LEAP) announced that its subsidiary Cricket Communications Inc. would buy the 17.5 percent stake in Denali Spectrum LLC and will transfer Denali ‘s wireless licenses and spectrum lease to Savary Island Wireless LLC in exchange for a non-controlling 85 percent stake.

 

Under the transaction, Savary Island will take $211.6 million of the outstanding senior secured debt owed by Denali to Leap. Moreover, Ring Island Wireless LLC is contributing cash to the Savary Island venture in exchange for a 15 percent controlling stake.

 

The deal will enable Cricket to capture Denali’s greater Chicago and southern Wisconsin markets. As a result of this news, Leap shares perked up 8.42% to $11.33.

 

Earlier in August, Leap also acquired the remainder of LCW Wireless (LCW) for $3.2 million. LCW is a joint venture between Cricket, CSM Wireless and WLPCS Management (WLPCS) and provides wireless service to customers in Portland, Salem and Eugene.

 

Leap is also making progress on Long-Term Evolution (LTE) network technology and plans to launch an LTE test market next year. In this regard, Leap also conducted a successful test of LTE network technology in San Diego with equipments from Huawei.

 

Leap expects to report a loss in net customer additions in the range of 170,000 to 200,000 during the third quarter of 2010. During second quarter 2010, Leap suffered 111,718 net subscriber loss compared with a net subscriber addition of 202,767 during the prior-year quarter. Total subscriber base, at the end of the reported quarter, was 5,288,157, an improvement of 16.5% year over year. The quarterly churn rate was 5% compared with 4.4% in the year-ago quarter.

 

Leap also adopted a “poison pill” strategy to thwart takeover plans and protect important tax benefits. Through this strategy, the company attempts to make its stock less attractive to the acquirer. If anyone buys 5 percent or more of Leap’s shares, or adds to a stake that is already higher than 5 percent, the stake can be diluted by the issuance of preferred shares to existing shareholders.

 

Leap faces stiff competition from AT&T Mobility LLC, Cellco Partnership and Sprint Nextel Corp. (S).

 

We maintain our Neutral recommendation for Leap Wireless. Currently, it is a Zacks #3 Rank (Hold) stock.