AT&T Is Making Too Big of a Leap

AT&T (NYSE: T  ) is now looking to acquire Leap Wireless (NASDAQ: LEAP  ) in a move that's very plainly a bid for more spectrum. While the headline cost is $1.2 billion, or $15 per share, AT&T is actually on the hook for a lot more.

After factoring in Leap's net debt of $2.8 billion along with other contractual obligations, the total bill will easily climb to over $5 billion. That's quite a price tag, and the overall package that AT&T is getting in return is rather questionable. In comparison, Verizon paid just $3.6 billion to a consortium of cable companies last year for a ton of spectrum in a much better deal.

First off, Leap's 3G network is built using CDMA, an entirely different and incompatible technology from AT&T's GSM and HSPA network. Ma Bell will now be tasked with integrating Leap's customer base and slowly migrating them to its own network before it can fully repurpose the spectrum it's acquiring, which in itself will take some time.

More importantly, AT&T currently operates in all of Leap's major regional markets. The areas where Leap has the strongest spectrum holdings (at least 26 MHz of certain bands) are cities like San Antonio, Houston, Denver, Phoenix, and Portland, to name a few. AT&T already has sizable spectrum licenses in all of these markets.

Much of Leap's spectrum is also in the advanced wireless services, or AWS, band. AT&T doesn't have as much AWS band, especially after it handed over AWS licenses to T-Mobile (NYSE: TMUS  ) as part of its breakup fee in 2011. In most markets, Leap's spectrum isn't contiguous with AT&T's, which may imply that AT&T is banking on upcoming technologies like carrier aggregation that can utilize non-contiguous spectrum bands.

It's also conceivable that AT&T was buying Leap's spectrum so that other rivals couldn't. BMO Capital Markets thinks Ma Bell was just trying to shut out T-Mobile from making a move. This is actually something regulators have taken note of, with the Department of Justice recently encouraging the Federal Communications Commision to structure an upcoming auction in a way that prevents "leading carriers from foreclosing their rivals from access to low-frequency spectrum."

Buying more spectrum licenses to build up capacity isn't necessarily a bad thing, unless you don't really need it and you're overpaying... like AT&T is.

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