This Stock Could Zip Like Zipcar

By JACK HOUGH  | MORE ARTICLES BY AUTHOR

A search for takeover targets turns up a wireless carrier with valuable, underused assets.

Will history repeat?

Investors in Leap Wireless International (ticker: LEAP) sure hope so because the company has plenty in common with Zipcar (ZIP), which just sold itself for a bundle. In short, Leap Wireless, like Zipcar, could fetch much more as a takeover target than as a stand-alone concern.

Zipcar shares soared Wednesday after the hourly car rental service agreed to sell itself to Avis Budget Group (CAR) for $12.25 a share, a 49% premium to its prior closing price. A proven winner, Zipcar isn't. Since the stock began trading in April 2011, it has lost more than half its value amid slowing sales growth and meager, sporadic profits. However, the deal makes sense, explained Avis Chief Executive Ron Nelson in a conference call, because Avis can make better use of Zipcar's assets than Zipcar can. (See Barron's Take, " Avis, Hertz May Drive Higher on Zipcar Deal ," Jan. 2.)

For example, Zipcar's customers use the service largely for weekend jaunts while Avis specializes in weekday business travelers. By combining the two brands, Avis can rotate cars throughout the week to improve what Wall Street analysts call capacity utilization: The portion of a company's gear that's kept busy turning profits.

Leap Wireless is in a totally different business but faces a similar situation. "They have always had a problem with having more assets than they can use," says Gerard Hallaren at Janco Partners, a Denver broker specializing in telecom research. Leap owns wireless spectrum reaching 137 million people in the U.S., of which about 30% is outside its operating area. On the portion inside its operating area, its utilization rate is just 40%.

Leap's limited operating scale puts it in an awkward place. Wall Street expects it to lose $260 million on $3.2 billion in revenue this year--and to continue losing money through at least 2016. Investor appeal is understandably limited. Of the 79.1 million shares outstanding, 21.7 million have been sold short. And the stock, which recently fetched $6.76, has plunged 80% in the past five years.

In a takeover, however, Leap could be worth far more. A major wireless carrier like AT&T (T) or Verizon Communications (VZ) could put Leap's spectrum to fuller use, and pick up some customers and infrastructure in the deal. Putting a price on a customer base is straightforward work, but prices for spectrum and infrastructure can vary widely. A lowball estimate puts Leap's value to a buyer at $7.50 a share, according to Hallaren -- an 11% premium to its recent price. Assuming more reasonable prices for the spectrum and infrastructure, Leap could go for double its current price.

Of course, an investor who bets on such an outcome is left holding a risky stock in the meantime. Leap, with a stock-market value of $535 million, carries a whopping $2.7 billion in net debt.

However, Leap could improve its fortunes without a takeover, by selling its spectrum and network. That would turn it into a "mobile virtual network operator," or MVNO. Those are asset-light wireless companies that typically sell prepaid plans while contracting with major carriers for call service. It's a competitive business, but one that can easily produce positive cash flows, something Leap lacks at the moment.

If Leap gets a decent price for its assets, the cash could erase its debt and perhaps even allow for some share repurchases. That would provide its long-suffering shareholders with a Zipcar-like turn of events.