Another Wrinkle in the Wireless Business (PCS, LEAP, DTEGY, S, VZ, VOD, T)

Print Email

Shares of MetroPCS Communications Inc. (NYSE: PCS) and Leap Wireless International Inc. (NASDAQ: LEAP) are shooting up today following a report at Bloomberg News that German phone company Deutsche Telekom AG (OTC: DTEGY.PK) is considering a merger of its T-Mobile USA unit with MetroPCS that would give DT a controlling interest in the combined company. Leap Wireless is rising because it is considered to be roughly equally attractive to a potential buyer, such as, say, DT, if the deal for MetroPCS doesn’t materialize.

T-Mobile USA is the fourth largest wireless carrier in the country, trailing Sprint Nextel Corp. (NYSE: S), AT&T Inc. (NYSE: T), and Verizon Wireless, a joint venture between Verizon Communications Inc. (NYSE: VZ) and Vodafone Group plc (NASDAQ: VOD). T-Mobile’s failed $39 billion merger with AT&T left the carrier with a couple of big problems: fleeing customers and no answer to either AT&T’s or Verizon Wireless’ rollout of their 4G networks.

T-Mobile’s 33 million customers are not enough to threaten either Verizon Wireless or AT&T and neither MetroPCS nor Leap would do a lot to change that. Each has fewer than 10 million subscribers. Sprint, with 56 million customers of which about 60% are lower-margin pre-paid customers, could tie up with either MetroPCS or Leap, both of which claim pre-paid subscribers as a majority of their customers. But neither T-Mobile nor Sprint could swallow the other, which is the only combination that could threaten Verizon Wireless or AT&T.

A merger between T-Mobile and MetroPCS would not really solve either of T-Mobile’s biggest problems. The largest benefit would be the addition of a lot of pre-paid customers, which could put a lot of pressure on Leap and the other pre-paid providers. But as a counterweight to the two big players, this deal doesn’t offer much.

MetroPCS’s shares are up 20.4% at $7.90, after posting a new 52-week low of $6.32 earlier this morning. The prior range was $6.38-$18.79. Leap Wireless’ shares are also up 20.4% at $6.19 in a 52-week range of $4.68-$17.66.

Paul Ausick