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Did Leap Wireless International, Inc. (LEAP) Get a Fair Price From AT&T Inc. (T)?

Investors of Leap Wireless International, Inc. (NASDAQ:LEAP) must be quite happy, as the company soared by 109% to nearly $16.70 per share in one day. The bullish momentum was due to the buyout announcement from AT&T Inc. (NYSE:T), which said that it would acquire Leap Wireless International, Inc. (NASDAQ:LEAP) for around $15 per share, for a total transaction value of $1.19 billion. Is a $15 per share a good offer for Leap Wireless International, Inc. (NASDAQ:LEAP) shareholders? Let’s take a closer look and find out.

AT&T Inc. (NYSE:T)Growing revenue, consistent losses and leveraged balance sheet

Leap Wireless International, Inc. (NASDAQ:LEAP), formed in 1998, is the provider of digital wireless services in 48 states and the District of Columbia under the “Cricket” brand. It currently has around 5.3 million customers, owning the wireless licenses covering 136.7 million POPs. Most of its operating revenue, $2.83 billion, was  generated from service revenue, while the company’s equipment revenue came in at only $241.85 million.

In the past five years, Leap Wireless International, Inc. (NASDAQ:LEAP) has managed to consistently grow its revenue, from $1.96 billion in 2008 to more than $3.14 billion in 2012. However, it has still generated losses, staying in the range of $(148) million to $(872) million. While its operating cash flow has been consistently positive, the free cash flow has been consistently negative. In 2012, its operating cash flow was $182 million and its free cash flow was $(259) million. What makes me worry is its highly-leveraged balance sheet. As of March 2013, it had $324 million in equity, $667 million in cash and short-term investments, and as much as $3.3 billion in long-term debt. Moreover, the company also booked a huge amount of goodwill and intangibles, at around $2.14 billion.

A higher valuation than Sprint Nextel Corporation (NYSE:S) buyout

At $15 per share, AT&T Inc. (NYSE:T) placed a high valuation on Leap Wireless International, Inc. (NASDAQ:LEAP), at around 12 times its trailing EBITDA. The EBITDA multiple seems quite rich compared to the Sprint Nextel Corporation (NYSE:S) acquisition. Recently, Leap Wireless’ bigger peer Sprint Nextel Corporation (NYSE:S) agreed to be acquired by Softbank at around $7.65 per share, valuing Sprint Nextel at $21.6 billion. Previously, Sprint Nextel had received a $20.1 billion offer from Softbank. However, DISH Network Corp (NASDAQ:DISH) joined the bidding war, raising the bid to $7 per share, or $25.5 billion in total value. Afterwards, Softbank increased its original offer to the total value of $21.6 billion.

Softbank’s offer was considered superior with the higher cash consideration of $16.6 billion, while the remaining $5 billion will go to the company in exchange for 78% ownership in Sprint Nextel. At the current offer, Sprint Nextel was valued at only around 5.4 times its 2013 EBITDA. In 2014, Softbank expected that Sprint will spend around $8 billion in capital expenditures, and then that amount will be reduced to $6 billion annually for the next four years. Softbank founder Masayoshi Son estimated that there would be around $2 billion in annual savings in the first four years due to the cost savings program.

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