The U.S. wireless industry is a highly competitive market that continues to get more cutthroat. To add a little fuel to the fire, the FCC recently approved an AT&T ( T 0.39% ) deal to purchase Leap Wireless (NASDAQ: LEAP), which was first proposed back in July.
The deal cost the nation's second-largest wireless carrier $15 per share in cash, or about $1.2 billion, and gives AT&T all of Leap's wireless network, the Cricket brand, and 4.6 million subscribers -- and yet another advantage in the wireless space.
Increasing customers, decreasing competition
The Cricket brand will be an independently operated and wholly own subsidiary of AT&T and comes with a big upside for the company. Cricket's network reaches 97 million people across 35 states, and AT&T is going to give Cricket customers access to its 4G LTE network, effectively adding a huge incentive for current Cricket subscribers, while expanding AT&T's network at the same time.
The deal also bolster's AT&T's presence in the prepaid wireless space, one in which T-Mobile and Sprint are already firmly planted. In a July press release AT&T said, "Cricket's employees, operations, and distribution will jump-start AT&T's expansion into the highly competitive prepaid segment."
For AT&T to win the FCC's approval, the company agreed to have an unlimited plan for feature phones priced at $40 per month for 18 months. The company also has to divest some wireless spectrum so that other carriers could eventually purchase it.
But the move is yet another blow to Sprint and T-Mobile, which are fighting tooth and nail against AT&T and Verizon, and hoping to make a merger deal of their own.
Does this make a T-Mobile/Sprint deal more likely?
Softbank, which owns Sprint, has been pushing for a merger between T-Mobile and Sprint for a while and has recently increased the rhetoric. Softbank's founder, Masayoshi Son, said that if the two smaller carriers could join forces they could start a "massive price war" that would benefit wireless customers. Son also said that a deal could usher in cheaper broadband connections for consumers as well.
But despite Son's desire to see a merger, reports have surfaced that the FCC Chairman Tom Wheeler, isn't convinced a merger would be good for competition. This isn't surprising, considering that an AT&T and T-Mobile merger was shot down several years ago because the government thought it would hurt competition. The Department of Justice has also said it prefers the country to have four, and not three, major wireless carriers.
AT&T investors should be glad to see the company snatch up additional spectrum, as well as customers, from the Leap deal. The new Cricket customers will make AT&T more competitive in the prepaid space, and rolling out the carrier's 4G network to Cricket customers could help boost the 4.6 million subscribers even higher. AT&T is already a massive powerhouse in the U.S. carrier market, and this deal only adds to its strength.
The company's stock is down more than 12% over the past year, so any news in gaining additional ground should be welcomed. AT&T has been hit hard by the smaller and scrappier T-Mobile, which has caused AT&T to shift some of its strategies. While acquiring Leap Wireless may help the company jump further ahead of T-Mobile in the prepaid space, investors shouldn't expect the magenta un-carrier to take it lying down.
As for Sprint and T-Mobile investors, don't hold your breath that this deal means the FCC is more open to a merger between the No. 3 and No. 4 carriers. There's been nothing but discouraging news coming from government officials related to a possible merger, even if it would be good for competition. All this deal means is that AT&T gets a bit stronger, and that Sprint and T-Mobile will have to fight even harder.