AT&T to Acquire Leap and Considering a Play in Europe (LEAP, T)

AT&T T announced Friday it will pay about $1.2 billion in a deal to acquire Leap Wireless International LEAP, according to USA Today.

The acquisition, which will give AT&T all of Leap’s assets, including stock, wireless properties, stores and nearly five million subscribers, comes to $15 per share in cash.

Leap, which operates under the Cricket brand name, is a major player in the pre-paid market, an area in which AT&T would like to build a presence.

The Federal Communications Commission and Department of Justice will review the terms of the deal, but AT&T expects everything to finalize in six to nine months. Once completed, AT&T plans to expand Leap’s offerings to include its LTE network.

In a statement, AT&T said, "The combined company will have the financial resources, scale, and spectrum to better compete with other major national providers for customers interested in low-cost pre-paid service."

Meanwhile, according to sources who spoke to Bloomberg, the Leap acquisition isn’t the only one piquing AT&T’s interest. The company is also looking for an M&A opportunity in Europe and has been busy exploring a number of possible options including Telefonica SA TEF and Vodafone Group Plc VOD

AT&T believes, according to those sources, that it can gain customers and boost profits by introducing its fast 4G network to a continent where 3G is still the standard.

Related: Verizon Slips to Second on LTE Speed, Maintains a Lead on Reliability

Some experts see the wisdom in that kind of thinking.

Roger Entner, with Recon Analytics LLC in Dedham, Massachusetts, told Bloomberg, “Europe is stagnant and ripe for someone to look at it from a different perspective.” Entner added, “AT&T would look at this and rightfully say, ‘We can do this better by bringing our playbook from the U.S.”

Another advantage for AT&T is the discounted valuation of potential European takeover targets. According to Bloomberg, carriers in Europe are trading at a 36 percent discount compared to U.S. carriers.

Entner said AT&T could take advantage of those lower valuations and use its vast financial resources to create an LTE network in Europe using several carriers.

“As a pan-European carrier, with coverage in multiple countries, they could treat every location as part of the same calling circle,” Entner said. This, according to Entner, would allow AT&T to get around Europe’s high roaming rates.

On the other hand, Tero Kuittinen, head of sales and marketing for Alekstra Oy, said that AT&T should take into account the extremely competitive nature of cellular service in Europe.

“AT&T has very little experience with true price competition,” Kuittinen told Bloomberg in a phone interview. “It is living in luxury in America, lolling on a satin pillow and lapping up fat profit margins.”

Representatives of AT&T, as well as Vodafone declined to comment to Bloomberg on any pending discussions between the companies.

At the time of this writing, Jim Probasco had no position in any mentioned securities.