The Deal: This Time, Washington is Unlikely To Foil AT&T's Plans

NEW YORK ( The Deal) -- If precedent offers any indication, there should not be any hurdles high enough to stop AT&T Inc.'s ( T) $4 billion plan to acquire Leap Wireless International Inc. ( LEAP) Still, the companies' merger agreement includes a substantial regulatory protection in case the deal is challenged by antitrust regulators or the Federal Communications Commission.

"Any deal involving AT&T is going to be scrutinized closely," said Paul Gallant, a telecom analyst at Guggenheim Securities LLC.

As insurance against a permanent injunction from Washington and the courts, the companies' agreement, announced Friday, calls for Leap to enter into a three-year long-term evolution data roaming agreement with AT&T, which will provide coverage in certain of Leap's markets not covered by Leap's LTE network.

If Leap enters into the roaming agreement, AT&T will then have the option within 30 days after entry into the roaming agreement to purchase certain of Leap's spectrum assets.

If AT&T does not exercise its right to purchase all of the specified spectrum assets, Leap can then within 60 days after expiration of AT&T's option require AT&T to purchase all of the specified assets.

The assets to be made available to AT&T will be spelled out in an exhibit to the merger agreement. The exhibit had not been made public Monday.

Leap, which operates under the Cricket brand, has a network covering approximately 96 million people in 35 U.S. states. AT&T has said it will retain the Cricket brand name, use Cricket's distribution channels and expand Cricket's presence to additional U.S. cities. Gallant said the regulators have been focused on preserving competition between the four major carriers -- AT&T, T-Mobile USA, Sprint Nextel Corp. ( S) and Verizon Communications Inc. ( VZ) -- and have disregarded competition from Leap and Metro PCS when it comes to measuring the state of play between the four large players. In rejecting the proposed combination of AT&T and T-Mobile two years ago, the Department of Justice and the FCC concluded that regional carriers like Leap were not meaningful competitors to AT&T Wireless.

"It's hard to see how they could flip that around now and try to block the Leap merger," Gallant told The Deal.

Chris King, an analyst at Stifel, Nicolaus & Co., shared Gallant's prediction that the deal will clear the regulators.

In a note to clients, King said antitrust regulators are not likely to find that the acquisition of Leap, which has less than 2% of the overall wireless market, would present a significant threat to competition in general.

However, he said the DOJ, which is likely to handle the antitrust review, might have some concerns about the national prepaid market, where Leap has a 9.5% share and AT&T about 13%. The prepaid market, he said, is already heavily concentrated according to antitrust regulators' standard measure of concentration, and the Leap acquisition would make the situation somewhat worse.

Currently, the Herfindahl-Hirschman Index in the prepaid market stands at 2,600, King said, and the deal would add almost 250 points. A market with an HHI over 2,500 points is considered highly concentrated.

But King said it's unlikely the DOJ would try to block the deal outright. Even though the DOJ stopped AT&T from taking over T-Mobile, the agency did not stop Bell takeovers of smaller carriers, which he said are better analogies to the Leap.

He added that AT&T and Leap have seen their prepaid subscriber levels and market shares erode recently, which also could reduce any concerns in the prepaid market.

Gallant predicted that DOJ and FCC worries about harm to individual markets could be addressed through local divestitures.

He noted that when the agencies have found competitive problems with wireless deals, they normally have required spectrum divestitures as they did with AT&T-Cingular in 2004, Verizon-Alltel in 2008 and Verizon-Rural Cellular in 2008 rather than reject acquisitions outright.

He said there's also a slim chance that the FCC would require that AT&T enable device interoperability in the lower 700 MHz portion of its spectrum holdings but he said that is unlikely because that condition wouldn't address a harm specific to the merger.

FCC Democrats have been looking at requiring industrywide device interoperability in the lower 700 MHz band, a regulatory mandate AT&T has opposed.

Written by Bill McConnell

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