Leap Wireless' recent remarkable rally reversed last week after MetroPCS postponed its initial public offering. The paper dropped 12 points from the 127 range after rising from the teens when the original lenders sold their exposure last year to vulture funds. "Investors in Leap's vendor-financing paper were hoping that a MetroPCS valuation could set a high valuation for Leap," said Romeo Reyes, senior v.p. for the high-yield research group at Jefferies & Co.
Reyes explained that the MetroPCS valuation derived from the proposed IPO could have been $2.05 billion, or 11.4 times EBITDA for 2004. He said if Leap could achieve a multiple of 8-10 times EBITDA, Leap's vendor paper could be worth 150. But one investor that buys distressed paper said he does not even see Leap going back to the high 120s. People were betting entirely on the MetroPCS valuation, said the buysider. "They were feeling there was going to be significant upside," he said. A sellside trader was less sure and noted this is a MetroPCS problem that does not materially affect Leap. But he would not say whether Leap could again be such a high-flyer.
MetroPCS said in a statement that the IPO has been postponed so the company can review accounting issues relating to previously disclosed financial statements that came to their attention Wednesday. "Metro did announce that they were going to delay their IPO and that could have had [an] impact on the trading levels of the bank debt," said Jim Seines, director of investor relations at Leap.
William Freeman, Leap's ceo, told LMW in June that the key to Leap's recovery has been a combination of both revenue generating and cost reduction actions (LMW, 6/11). But it was the filing by MetroPCS that could have potentially boosted Leap's paper into the stratosphere. MetroPCS and Leap have similar business models, said Reyes. Both offer unlimited usage of minutes within a certain service area for a fixed monthly rate; unlike traditional companies that provide roaming services and charge by the minute, he explained. Investors in Leap's paper who have approximately $1.6 billion in outstanding claims, are lined up to receive 96 1/2% of the equity in the company and $350 million in new debt when the company emerges bankruptcy.