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FCC Approves AT&T's $1.2 Billion Acquisition of Leap Wireless with Conditions

Wednesday, March 19, 2014

By Bryce Baschuk  

March 13 --The Federal Communications Commission approved, with conditions, AT&T Inc.'s $1.2 billion acquisition of Leap Wireless International Inc. in an order.

AT&T gains Leap's valuable spectrum portfolio and 4.6 million new subscribers under the low-cost Cricket brand. The merged entity now holds 46-180 megahertz (MHz) of spectrum in overlapping markets that cover 137 million people, or 44 percent of the U.S. mainland population, according to FCC records.

AT&T will also assume Leap's $2.8 billion in net debt as a result of the deal.

Leap provides an average of 23 MHz of spectrum capacity in markets along the Mid-Atlantic seaboard--in cities like Washington, Philadelphia, Baltimore and Richmond, Va.--and west of the Mississippi River--in cities like Denver, Houston, Phoenix, Kansas City, Mo., San Antonio, San Diego and Portland, Ore. That spectrum borders some of the valuable 1695-1710 MHz, 1755-1780 MHz and 2155-2180 MHz bands teed up for FCC's AWS-3 auction in later this fall.

FCC Notes Public Interest Concerns

The FCC March 13 said it was “concerned about the potential for the proposed transaction to result in certain public interest harms,” according to the text of the order. However, following certain concessions from AT&T, the commission said that the public interest benefits of the deal “outweigh the likelihood of significant public interest harms, such that overall, the proposed transaction is in the public interest.”

The FCC's approval of the deal incorporated commitments by AT&T to offer low-cost rate plans, increase LTE (long-term evolution) network deployment, agree to roaming commitments and provide device trade-in and trade-in credits for some Leap customers. AT&T will also divest some of its spectrum holdings in a dozen markets in Texas, Washington, Nevada, Louisiana and Kansas.

AT&T's subsidiary, Leap Licenseco, will now divest Leap's 700 MHz A block license in Chicago in a sale that will entitle each Leap stockholder to a pro rata share of the net proceeds via a non-transferable contingent value right. Leap purchased that spectrum from Verizon Wireless Inc. for $204 million in August 2012, according to filings with the U.S. Securities and Exchange Commission. The returns from that sale depend on AT&T's ability to resolve interference and interoperability issues stemming from the FCC's 2013 interoperability agreement.

Deal Approval Comes Months Ahead of AWS-3 Auction

AT&T stands to increase its overall holdings of Advanced Wireless Services (AWS) spectrum if it successfully purchases some of the 65 MHz of spectrum set to be auctioned from the AWS-3 band. The Middle Class Tax Relief and Job Creation Act of 2012 (Pub. L. No. 112-96) requires the FCC to auction and license spectrum in the AWS-3 band by February 2015.

Customers from AT&T and Leap will gain better network experience following the incorporation of Leap's AWS and PCS spectrum holdings in AT&T portfolio, the company said in recent FCC filings. AT&T argued that the deal will “generate significant public interest benefits without any harm to competition.”

As a result of the deal, Leap customers will gain access to AT&T's 4G (fourth generation) LTE/HSPA (High Speed Packet Access)+ network, more competitive rate plans and a wider selection of handsets, the company said. AT&T will also maintain Leap's prepaid $40 unlimited talk, text, and data rate plan for feature phones.

The deal could potentially add over 500,000 of Leap's Lifeline subscribers to AT&T, according to some estimates. The FCC's Lifeline program offers financial discounts for phone service to eligible households and is funded by Universal Service contributions from U.S. telephone customers.

Roaming Concerns Remain

Critics of the deal said it will exacerbate the high roaming rates that dominant carriers like AT&T and Verizon currently charge smaller carriers in rural areas. Steven K. Berry, the president of the Competitive Carriers Association, said the FCC “lost an opportunity today to provide the industry with some needed guidance of what does and doesn't constitute a 'commercially reasonable' offering of data roaming under the commission's rules,” in an e-mail. “ To my knowledge, AT&T has yet to offer any 4G LTE roaming relationship to any other carrier in the U.S., except as a 'condition' to a buyout offer,” he said.

AT&T said it will honor the rates, terms, and conditions of Leap's CDMA (code division multiple access) roaming agreements and offer CDMA voice and data roaming “consistent with applicable commission roaming rules, for so long as AT&T operates Leap's CDMA network,” the company said in recent filings. AT&T clarified that the commitment would not require AT&T to modify the rates, terms, or conditions of any CDMA roaming agreement it assumes from Leap. Critics of AT&T's commitments previously said the company has included “a number of escape clauses that will enable it to avoid having to implement any conditions with significant impact on the harm that this transaction will cause.”

AT&T's concessions will not satisfy the deal's impact on wholesale roaming costs because the company does not make any commitments regarding LTE roaming, said Martyn Roetter, an analyst with Information Age Economics.

“This means in practice that at most these CDMA roaming agreements will remain for up to 18 months in a diminishing number of areas, and no more than 12 months in others, as AT&T migrates Leap's frequencies to LTE,” Roetter told Bloomberg BNA.

The FCC's decision represents “another step along the path to eliminating small and medium wireless operators as autonomous competitors and sends a deeply discouraging signal to all opponents of the anti-competitive and customer-hostile actions of the U.S. wireless market leaders,” he said.

To contact the reporter on this story: Bryce Baschuk in Washington at bbaschuk@bna.com

To contact the editor responsible for this story: Heather Rothman at hrothman@bna.com


For more information, read the FCC order here: http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-14-349A1.pdf.

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