Back in 2007, MetroPCS (PCS) made an unsolicited $5.1 billion bid for rival Leap Wireless (LEAP). All in all, it was a strong offer, but Leap was resistant. The company thought that its prospects were much better as a stand-alone operation because of several planned launches into new markets, such as Los Angeles. In hindsight, it was a huge blunder. Leap's market cap is now only about $1.15 billion.

Now for some irony: Leap has hired Goldman Sachs (GS) to explore a sale of the company.Leap focuses on the prepaid wireless market, which has been a growth story. The recession has actually been a booster for the market as unemployment persists and consumers have difficulties with their credit. According to a Leap investor presentation, the "value" segment is expected to represent 25% of the total wireless market by 2014.

Essentially, Leap is making inroads to an underserved customer base. For example, about 55% are younger than 35 and 50% earn less than $35,000. To make money, Leap has built a cost-effective network and knows how to get strong returns on marketing dollars.

In the most recent quarter, Leap reported a 25% increase in service revenues to $541.3 million and adjusted operating income of $121.5 million. In all, it had 116,000 net customer additions.

Brutal Competition

So why sell out? The problem is that the competitive environment is fierce. Just look at Verizon Wireless (VZ). In its latest quarterly report, the company added 1 million customers through its prepaid program using resellers like Tracfone Wireless. As should be no surprise, much of the business has come through retailers like Walmart (WMT).

Another formidable competitor is Boost Mobile, which is a part of Sprint Nextel (S). The company has a popular $50 plan for unlimited use.

Of course, Leap would like to get a juicy offer from a mega-carrier like AT&T (T) or Verizon. However, even though Leap's user base would be a worthwhile addition, a deal would be extremely difficult. Besides the differences in network infrastructures, such a combination would also likely face serious antitrust barriers. AT&T and Verizon control 30% and 32% of the U.S. market, respectively.

What About MetroPCS?

Another possibility is for a foreign carrier to make a deal. Some of the possibilities include America Movil and Deutsche Telekom, which operates T-Mobile USA. However, such a tie-up would also be complicated, such as with technology incompatibilities.

Or perhaps a private equity investor will make a purchase. After all, Goldman and TPG made a decent profit from their purchase of Alltel. However, it could be difficult to arrange financing, especially in light of the risks in the mobile industry.

This brings us to yet another irony: the most logical buyer is MetroPCS. The networks would mesh together, and the customer focus is mostly the same. More important, both need to bulk up against the competitive threats.

Still, given that the alternatives are iffy, it's going to be tough for Leap to get a big premium. Yes, it looks like the company is a few years too late.

Tom Taulli advises on
business tax preparation and resolving tax problems. He is also the author of a variety of books, including the including The Complete M&A Handbook. His website is at Taulli.com.

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