Leap Wireless: No Easy Sell

Leap Wireless has hired Goldman Sachs and asked its board members to consider selling the company, according to The Wall Street Journal. Leap's shares jumped 13.1% today, to $14.92, amidst investor hopes of a quick deal.

Chances are, selling Leap won't be easy, however. As Michael Nelson, an analyst at Nelson Alpha Research, points out in his Feb. 1 note, "We believe an acquisition by AT&T or Verizon is unlikely, owing to significant regulatory hurdles associated with the companies' high market share at 30% and 32% respectively." A deal would mean major divestitures.

The most likely buyer, MetroPCS, has long resisted merging with Leap. The two companies' cultures differ, and its management had been known to exchange potshots during a prior merger attempt.

Moreover, the combination would basically bring together two companies that are struggling to grow and prosper. In the first nine months of 2009, Leap's losses mounted. Metro is in the black, and growing, but that may change. Amidst rising competition, both companies have been aggressive on pricing, and Metro's financials could suffer as a result. "We expect no free cash flow generation in 2010 and note that next year's free cash flow generation will be highly dependant on how far the company can cut capital spending," Pali Capital analyst Walter Piecyk wrote in a Jan. 14 note.

Leap has other options: A private-equity investor could take an interest in Leap, or facilitate a Leap-Metro merger. A foreign telco could buy Leap to gain a toehold in the U.S. market.