Leap to MetroPCS: Come Back With a Real Offer

It took less than two weeks for Leap Wireless (Nasdaq: LEAP) to confirm what the market expected -- MetroPCS's (NYSE: PCS) offer to acquire the company in a stock-swap deal now valued at $4.7 billion is too low. Leap CEO S. Douglas Hutcheson issued a public letter in response to MetroPCS's proposal that made it clear the company would not sell under the current terms.

The letter contains the token "not in the best interest of our shareholders" statement, but the language quickly grew harsher when Hutcheson termed MetroPCS's offer as "completely inadequate in a number of critical areas." After outlining several flaws in the proposal, he ultimately stated that Leap's projected 34.5% stake of the combined entity "dramatically undervalues our contributions."

MetroPCS responded with its own pointed letter. The company reiterated that it believes the offer was full and fair and said Leap's management has maintained "highly unrealistic valuation expectations."

The letters make it obvious that the CEOs of both companies believe their shares are undervalued while the other company's shares are artificially inflated. While Leap questioned MetroPCS's capability to deliver on performance promises, MetroPCS claimed that Leap's shares have been propped up by expectations surrounding the merger.

Since the two companies are not even close to agreeing on Leap's value, Wall Street analysts have taken to one method of measuring value in a company -- comparing the purchase price with next year's estimated earnings before interest, taxes, depreciation, and amortization (EBITDA) of the target company.

Jefferies analyst Romeo Reyes says MetroPCS's offer is lower than typical, at about 8.5 times Leap's projected EBITDA. Stanford Group analyst Michael Nelson estimates that Verizon Wireless, which is a joint venture between Verizon Communications (NYSE: VZ) and Vodafone (NYSE: VOD), is paying about 9.5 times estimated EBITDA for Rural Cellular. And Dexia SA's Rob Goyens estimates that Deutsche Telekom (NYSE: DT) put a 13.1 times EBITDA bounty on SunCom Wireless. AT&T's (NYSE: T) price for Dobson Communications and the value Sprint Nextel (NYSE: S) has been giving for regional affiliates it has acquired have been between nine and 11 times EBITDA.

But with a lot more complexity involved in a merger, a simple ratio doesn't tell the whole story. It also leaves plenty of wiggle room for companies and their advisors to argue for a higher price. And these public communications suggest that there's a long way to go before these two companies agree on much of anything.

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