Leap Wireless Combines its Cricket Service With Pocket Communications in South Texas
Call it an example of newfound pragmatism among the flat-rate wireless service providers, which are coming under growing pressure to consolidate.
San Diego’s Leap Wireless (NASDAQ: LEAP) announced today that it’s forming a “joint venture” with San Antonio, TX-based Pocket Communications that will provide pre-paid wireless services to customers of both companies in South Texas. As joint ventures go, however, this one clearly puts Leap in the driver’s seat.
Under the agreement, Leap, the operator of the Cricket wireless network, will own 76 percent of the joint venture and will manage wireless services in a region that extends from San Antonio to Laredo and includes the Rio Grande Valley. “As one step in the transaction,” the company says in a statement, “Leap will purchase some of Pocket Communications’ South Texas assets for approximately $38 million in cash.” Leap says it also will contribute its own assets in South Texas to the joint venture—along with the remainder of Pocket’s assets. (Pocket Communications, which also serves areas of Massachusetts and Connecticut, says its New England operations are not included in the deal.)
Other terms of the deal make the joint venture sound more like a de facto acquisition. Leap says that after the joint venture has operated for three and a half years, the two partners will gain certain rights to Pocket’s 24-percent stake. And if Leap gets acquired or merges with another company—which is a much-rumored possibility—Pocket will be obligated to sell its stake in the joint venture.
Speculation about a Leap M&A deal erupted in January, after the Wall Street Journal reported that Cricket’s parent company had hired investment bankers to advise it on its strategic options. I called Leap spokesman Greg Lund to ask if those bankers had advised the company on this deal. Lund did not answer that question directly. Instead, as today’s unusual South Texas snowfall swirled around him, Lund replied, “We’re interested in growing, however that might manifest itself… We’re always looking for synergies that can be brought to bear.”
Yet in explaining some background details, Lund also laid out what is, in effect, a pragmatic deal for both companies.
Lund says Pocket has been a formidable competitor since Leap began to build out its wireless infrastructure in South Texas roughly three years ago. Leap acquired the rights to multiple wireless spectrum licenses in San Antonio, Del Rio, El Paso, and other communities in 2006, when the San Diego company spent just under $1 billion to acquire the rights to almost 100 licenses throughout the United States.
The wireless infrastructure built by both companies is based on Qualcomm’s proprietary CDMA technology. So there are no insurmountable technical challenges to combining operations—and the joint venture enables Pocket to combine its 320,000 pre-paid wireless customers with Leap’s 400,000 customers. Leap says the joint venture is expected to generate significant operational cost savings after 12 months.